My Method for Making Money Trading Mispriced Options with AI

The Setup

A trader gets tired of gambling on cheap calls from Reddit tips. He decides to learn the actual math behind options pricing and discovers that volatility skew creates repeatable mispricings you can exploit with vertical spreads.

What the AI Found

1. 1.Scans the S&P 500 and flags 8 stocks with skew z-scores below -2.0, meaning their current skew is 2+ standard deviations steeper than the 30-day average. Statistically rare and likely to revert.
2. 2.For the top candidates, compares IV vs realized volatility at each strike. OTM options are pricing in 40-60% more movement than the stock actually delivers. ATM options are fairly priced. That gap is the edge.
3. 3.Momentum confirmation narrows it down: positive momentum + rich call skew points to a bull call spread. Negative momentum + rich put skew points to a bear put spread.
4. 4.Builds the spread: buy the ATM option (fairly priced, ~50 delta), sell the OTM option (overpriced, ~15 delta). The overpriced leg subsidizes the trade and creates asymmetric payoff.

The Trade

Bull call spread on the top-scoring candidate. Buy ATM call (~50 delta), sell OTM call (~15 delta), 3-week expiry. Net debit is reduced because the OTM leg is overpriced. Score: 87/100.

The Result

Win rate sits at ~38% but average winner returns ~250% while average loser costs ~60%. Winning 4 out of 10 trades at 3-4x return covers the 6 losses easily. The strategy is asymmetric by design, not every trade wins but the math works over time.

The Prompt

Run a full volatility skew mispricing scan on the S&P 500. I want to find stocks where OTM options are abnormally overpriced relative to ATM, then build vertical spreads on the best candidates.

Step 1 - Skew Screen:
For every S&P 500 stock, calculate the 25-delta put skew and call skew vs the 30-day historical average. Compute the z-score for each. Flag any stock where the skew z-score is below -2.0 (i.e., skew is 2+ standard deviations steeper than normal). Show me a ranked table of all flagged stocks with their z-scores, current skew, and historical average skew.

Step 2 - IV vs Realized Vol Mismatch:
For the flagged stocks, compare implied volatility vs 20-day realized volatility at both the ATM strike and the 25-delta OTM strike. I want:
• OTM IV significantly HIGHER than realized vol (overpriced)
• ATM IV roughly EQUAL to or LOWER than realized vol (fairly priced)
Show the IV/RV ratio at each strike for every candidate. Drop any stock where the mismatch doesn't confirm.

Step 3 - Momentum Confirmation:
For the remaining candidates, check directional momentum using EMA 20/50 crossover, RSI (14), and MACD (12, 26, 9). Determine:
• Positive momentum + rich call skew = bull call spread
• Negative momentum + rich put skew = bear put spread
Drop any stock where momentum contradicts the skew direction.

Step 4 - Build the Spread:
For all surviving candidates, construct the optimal vertical spread:
• Buy the ATM option (~50 delta, fairly priced leg)
• Sell the OTM option (~15-25 delta, overpriced leg)
• Expiry: 2-4 weeks out
For each spread show: strikes, net debit, max profit, max loss, breakeven, risk-reward ratio, and a payoff diagram. Score each setup out of 100.