Max pain

Quote from Nine_Ender:

As an experienced options trader I can tell you the general idea behind "max pain" is important. Its not every stock but I can tell you there are many stocks that frequently regress to whole number areas on expiry day. If you hold until late in the day on a barely "in the money" position, more times then not you will be screwed out of most of your money, only to see the stock start to trade normally again on the following Monday.
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If you look each month at the distribution of expiration prices of nearly 3,000 optionable stocks, they lie fairly evenly distributed across the price spectrum. They don't cluster near strikes.

Many have passed thru these and other boards claiming its feasiblility and existence. Lotta talk but nary a one who has been able to correctly predict the expiration price of stocks several days before expiration.
 
Thanks Carl,

I will check out those links. I was just curious about all the hoopla surrounding "max pain" and thought it was appropriate time to bring up :)
 
Quote from Martinghoul:

I have seen this effect occasionally in Bunds. It's not smth I would call "statistically significant", so wouldn't bet the farm.
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Some time back someone posted a link to a study that indicated that the effect of max pain at expiration was something like 15+ cents. My 15 cents is that market and sector direction as well as individual stock news are more likely to get you further than guessing which stocks might move that much and in what drection. Yep, don't bet the farm.
 
Quote from spindr0:

If you look each month at the distribution of expiration prices of nearly 3,000 optionable stocks, they lie fairly evenly distributed across the price spectrum. They don't cluster near strikes.

Many have passed thru these and other boards claiming its feasiblility and existence. Lotta talk but nary a one who has been able to correctly predict the expiration price of stocks several days before expiration.
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My experience suggests your first statement is simply wrong. I see clustering around strike price every month on Canadian stocks. The potential strike price tends to become fairly obvious around late Thursday afternoon, except for stocks subject to news/major catalyst on Friday.

The trading strategy associated with this theory evolves around exit strategies for existing option positions. In addition, it is rarely advisable to pick up options barely in or out of the money close to expiry because they often expire worthless or at a much lower valuation.

I would suggest to you that traders who doubt this theory are not very experienced holding such positions. I would also suggest to you that within the trading desks of some major option sellers are some traders who don't advertize publically how they manipulate stocks on expiry day. Many. many stocks drag against their prevailing trend from 1:30 pm to 4 pm on expiry day, only to continue their trend on the next Monday.

Trade what you believe I know this is a valid theory.
 
As usual, Spin and Martinghoul are right.

In the last few months, as I have extricated myself from the May 6 debacle, I have held a noticeable number of options right to expiry and collected on them ( or in a few cases paid on them) as they were ITM. The logic behind max pain makes sense, but with most stocks and indexes, the option holders and market makers are not holding a significant enough percentage of the overall volume traded to move the market effectively in the way that max pain proponents suggest. The suggestion about 15 cents plus or minus seems about right.

With the most actively traded index options--RUT, NDX and SPX-- you also have the process they use to settle which messes up the max pain trading ideas completely. The settlement price cannot be exactly predicted in advance. Usually it winds up close to the open price for Friday, but it always a little different than that, and once in a while it is wildly different. (I don't want to reopen this discussion-- people who want to investigate this further can search for a few threads on the topic; it has been thoroughly discussed before. ) Today, the SPX settlement price was 1242.35, but the open was 1243.63. This was good for me, but neither of these numbers supports any kind of max pain argument. In fact, they are both more or less in the middle between two strikes--1240 and 1245.
 
Quote from Nine_Ender:

My experience suggests your first statement is simply wrong. I see clustering around strike price every month on Canadian stocks. The potential strike price tends to become fairly obvious around late Thursday afternoon, except for stocks subject to news/major catalyst on Friday.

I would suggest to you that traders who doubt this theory are not very experienced holding such positions. I would also suggest to you that within the trading desks of some major option sellers are some traders who don't advertize publically how they manipulate stocks on expiry day. Many. many stocks drag against their prevailing trend from 1:30 pm to 4 pm on expiry day, only to continue their trend on the next Monday.

Trade what you believe I know this is a valid theory.
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1) I have no clue what happens north of the border with Canuck stocks.

2) As for Murican stocks, in the days before $1 price increments when strikes were $2,50, $5, and $10 apart, I used to cull expiration prices on optionable stocks from my database and occasionally posted the results. EVERY month the distribution across price spectrum was fairly even with no anomalous results.

3) As for manipulation of stocks on expiry day by trading desks, how does the max pain theory tell which ones they're working? When January expiration approaches, on Weds or Thurs, please list a few here. Please do the same for AMZN, GOOG, PCLN and AAPL. Please feel free to add your own favorites.

4) You "suggest to you that traders who doubt this theory are not very experienced holding such positions" ? Please provide some statistical support for your premise rather than inferences about people's experience.
 
option pain is very important but only in specific circumstances.


in general the stock should be relatively illiquid so that it does not cost the market maker much to get it to the desired zone. in December the max pain usually works the best because of the lower liquidity in general. it provides very good swing trading opportunities.

equally the max pain is close to irrelevant for anything with high daily volumes in the underlying stock.

it is very likely many traders on ET do not believe in max pain - largely because majority here trades only in very liquid stocks...

p.s. and yes Canada works better - largely because it is much less liquid...
 
I would idly theorise that it's not about liquidity solely, but rather liquidity relative to the size of option open interest arnd particular strikes. In my experience (not stocks, but bond futures) a lot of stars need to align for the effect to be noticeable. Hence, my suggestion that it's statistically not significant.
 
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