Max pain

dhpar · Jan 20, 2011

Quote from atticus:

dhpar's ticker went from 12.8x to 10.9x from 12/9 to date; and the highest dollar value in OI was in the 12.5 and higher strike prices. I don't see any way to correlate max-pain and a drop in the shares towards the low dollar value strikes (in terms of OI).

max pain was actually ~10.80 for quite some time. so here you go - stock price from 12.8 to 10.80 as of now. the reason is exactly the same as the reason behind manipulating the VIX settlement price... and it was done on tiny volume (daily around $2M in cash) which was helped by retail stop losses no doubt....

in general i would never use M-P on liquid stock or high market cap companies as i mentioned at the beginning of the thread. for spiders (or GOOG) it must be close to irrelevant if only because the option trading concentrates more on gamma. that is not possible with illiquid stocks where dynamic replication does not apply 100% - if you see my point...

atticus · Jan 20, 2011

Quote from dhpar:

max pain was actually ~10.80 for quite some time. so here you go - stock price from 12.8 to 10.80 as of now. the reason is exactly the same as the reason behind manipulating the VIX settlement price... and it was done on tiny volume (daily around $2M in cash) which was helped by retail stop losses no doubt....

in general i would never use M-P on liquid stock or high market cap companies as i mentioned at the beginning of the thread. for spiders (or GOOG) it must be close to irrelevant if only because the option trading concentrates more on gamma. that is not possible with illiquid stocks where dynamic replication does not apply 100% - if you see my point...

OK, but I can't arrive at 10.80 when the high $*OI strikes (C/P combined) has been the 12.50. Max pain would have been a pin of 12.50 (at exp) based upon the 12/9 data. I think that either your data is bad or we have a difference of opinion on the definition of max-pain.

dhpar · Jan 20, 2011

Quote from atticus:

OK, but I can't arrive at 10.80 when the high $*OI strikes (C/P combined) has been the 12.50. Max pain would have been a pin of 12.50 (at exp) based upon the 12/9 data. I think that either your data is bad or we have a difference of opinion on the definition of max-pain.

well, i do not remember what exactly was the max-pain for each individual stock on the list as of 9dec. after all that's why the tool discussed above comes handy.

I guess that the stock price went down from 12.80 in direction to the max-pain (either 12.50 or 10.00 at the time). as people rolled their long positions into 10.00 calls (for instance) the max pain moved even lower (if it really was 12.50 on 9dec as you suggest) and took the stock with it even lower.

p.s. of course in the post above I wanted to say that the max-pain is 10.00 for some time - mistyped it for the current stock price. sry

atticus · Jan 20, 2011

Quote from dhpar:

well, i do not remember what exactly was the max-pain for each individual stock on the list as of 9dec. after all that's why the tool discussed above comes handy.

I guess that the stock price went down from 12.80 in direction to the max-pain (either 12.50 or 10.00 at the time). as people rolled their long positions into 10.00 calls (for instance) the max pain moved even lower (if it really was 12.50 on 9dec as you suggest) and took the stock with it even lower.

p.s. of course in the post above I wanted to say that the max-pain is 10.00 for some time - mistyped it for the current stock price. sry

Well, there hasn't been any comparable dollar-weighted volume in the 10 strike since you posted the ticker. Max pain can be mid-strike if volume is in the guts; i.e., the 105C are showing a lot of volume, but oddly not the 105P, and the 100P and not the 100C. It would then print a max pain at 102.50, for example.

It could be that the 10-strike would cause max-pain with the shares at $13, but that causes problems as volume drops off in the itm as shares rise. Traders are less likely to go deep as a proxy for shares. It's hypothetical in this case, but shows how max-pain can be moving target from day to day

OK, typo corrected. For those unaware; max-pain will typically print at the strike-price, as both puts and calls must go off pinned to guarantee the total loss of premium.

I don't buy it, obviously, as pin-risk avoidance (arb-unwinding) was far more plausible but has been debunked as an anachronism related to a time when option volumes were a much larger % of notionals traded. If for no other reason than there were half the stocks that were optionable. It didn't rely on option volume at all; it was the unwinding of shares related to the reversals/conversions which was a force for pinning. I know of two funds who trade a large portion of their equity derivatives book on the arb-unwinding phenomenon. To simplify, it's why you're not allowed to make calls from the option post on the floor. There is a lot more edge in front-running the delta1/spot hedge than trading the option flow.

And of course, max-pain is worthless (and dangerous) if there is any arb-volume in a ticker.

Jan is the lime rectangle peaking at 15:

xflat2186 · Jan 20, 2011

Referencing the good old days when you could stand around and work into reversals and conversions for nice edge all day and all month or the days when you could sit upstairs and pick off the specialists who had their markets out of line and turn edge on reversals and conversions from off the floor? Ahh the good old days!

Max pain LOL.. this topic never gets old, there is always a crop of people who never read about it and buy in hook line and sinker

atticus · Jan 21, 2011

Quote from xflat2186:

Referencing the good old days when you could stand around and work into reversals and conversions for nice edge all day and all month or the days when you could sit upstairs and pick off the specialists who had their markets out of line and turn edge on reversals and conversions from off the floor? Ahh the good old days!

Max pain LOL.. this topic never gets old, there is always a crop of people who never read about it and buy in hook line and sinker

Amen. I'll add one more bit. For every buyer there is a seller. If max-pain is X for buyers then X is max-gain for sellers. I seriously doubt that the "powers that be" are short g/v types selling deeps in AAPL to force a 320 expiration. I know we can belabor large cap vs. small cap manipulation, but it has an air of EW to me. Looks ok in hindsight if you find what you're looking for.

bilbod · Jan 23, 2011

Let me make a few comments. Using Max Pain is no different than any TA pattern, by themselves they give you only a slight edge over random entry; however, use some common sense and some filters and you can have a solid profitable trading strategy.

Market Makers can push the market when conditions are favorable but they cannot push every stock to whatever price they please. Use some common sense, if IBM is trading at $150 and Max Pain strike is $125 and there are 3 hours to expiration, there is very little chance IBM will close at or near $125. Also note that it is easier to manipulate individual stocks than ETFs and Indexes.

Here are some suggestions to help you trade Max Pain.

1. Eliminate stocks that have news events pending in the near future.

2. Expiration morning calculate the Max Pain strikes above the current price and below the current price. Check after the 1st hour of trading to see if the stock is trending up or down. If it is, the MMs will find it easier to push the stock in the direction of trend. Also, as the day progresses, the MP strike can change so keep your eye on that.

3. Check Support/Resistance to see if it could block the anticipated move.

4. The price does not have to go to the MP strike and that is not necessary for you to make a profit.

5. You need to practice trading until you get the nuances of your trading style down.

Nothing works 100% of the time, you will take losses and they need to be accounted for in your trading plan.

traderlux · Jan 23, 2011

bilbod,

a good post, and your outline is almost identical to my thinking on the subject.

i think in addition to the mm influence, you also have the effect from hedgies and other 'tutes that use options for both spec and protection strats that will move things around on expiration.

jeff augen has several books related to the subject also.

Quote from bilbod:

Let me make a few comments. Using Max Pain is no different than any TA pattern, by themselves they give you only a slight edge over random entry; however, use some common sense and some filters and you can have a solid profitable trading strategy.

Market Makers can push the market when conditions are favorable but they cannot push every stock to whatever price they please. Use some common sense, if IBM is trading at $150 and Max Pain strike is $125 and there are 3 hours to expiration, there is very little chance IBM will close at or near $125. Also note that it is easier to manipulate individual stocks than ETFs and Indexes.

Here are some suggestions to help you trade Max Pain.

1. Eliminate stocks that have news events pending in the near future.

2. Expiration morning calculate the Max Pain strikes above the current price and below the current price. Check after the 1st hour of trading to see if the stock is trending up or down. If it is, the MMs will find it easier to push the stock in the direction of trend. Also, as the day progresses, the MP strike can change so keep your eye on that.

3. Check Support/Resistance to see if it could block the anticipated move.

4. The price does not have to go to the MP strike and that is not necessary for you to make a profit.

5. You need to practice trading until you get the nuances of your trading style down.

Nothing works 100% of the time, you will take losses and they need to be accounted for in your trading plan.