This finance website calculates the weekly and monthly max pain
cash value for stocks. Max Pain theory states that the stock price
on option expiration will be at the strike where the most options
(by cash value) expire worthless. This is due to hedging activity
by the option writers. Thus, you can predict where the stock price
will be in the future and trade accordingly.
Aapl stock has been moved dramatic in the last quarter of 2012
and so far in 2013. The action in the stock has been so
furious, that the weekly max pain numbers are easily over
run. Max pain has not held recently.
But, with the close of stock today Friday January 18, 2013 it
looks like max pain may have been a factor. Today was an
maturity date for the monthly options. January 2013 may have
had a high number of open options due to LEAPs. Perhaps the
higher monthly open interest and the additional LEAP contracts were
enough to influence the stock price.
AAPL closed today at 500.00.
To close at such a round number is highly unusual. It is
also important to note the previous days close was 502.68.
Now have a look at the Jan 2013 monthly open interest.
This graph shows the open interest prior to the market open on
Friday. Notice the spike in both puts and calls at the 500
Now, max pain wasn't 500. It was 525. There were a
large number of open contracts not visible on this snippet of the
But consider this, since the previous close was about 502, the
only strike with a high open interest inside of 10% or 50
point move in either direction was the 500 strike. Is it
coincidence that the stock closed right at 500, rendering the calls
and puts worthless?
More importantly, does this suggest a way to forecast AAPL stock
prices? Is AAPL likely to close at the highest open interest
within 2-5% of the previous close?
I'm pleased to announce the release of the max pain history
page. I received a number of requests for this
The page displays the max pain cash value figures and the
closing stock price for the various option expiration dates in
a specified month. For example, if you choose AAPL stock and the
12/7/2012 weekly option expiration, you will get the graph and data
for all the AAPL weekly options in December.
If the stock you selected doesn't have weekly options, only the
monthly option expiration is returned. For example, ticker
MRK (Merck) doesn't offer weekly options. If you
display MRK and 12/7/2012, you will only get the monthly option
expiration on 12/22/12
I received a few requests for historical max pain values
recently. AAPL max pain history is the one most often
Unfortunately I do not store the max pain values for AAPL of any
other stock beyond the option expiration date. The short
answer is my server is short of hard drive space and processing
power. It is difficult to justify the storage necessary to
maintain a history. It doesn't have the capacity at this time
to store historical values. In addition, I fetch
option data on-demand in response to user requests. This
means I would need to create an automated system to collect data to
in order to ensure I have no gaps in the history.
However, I may be able to store AAPL historical max pain
values. Limiting the website to one stock will reduce the
load on the server. Plus, AAPL is such a popular stock I
don't think I would need to worry about missing a day leaving the
Maintaining AAPL max pain historical data is on the to-do
list. I will keep blof updated with my progress.
One put selling strategy is to establish a long position by
selling puts. The option seller (or option writer if you
prefer) is obliged to purchase the stock at the strike price.
If you want to establish a new long position in the stock, sell the
put options at your entry price. Keep in mind that each
option contract is for 100 shares. When you write the
contract, you will collect the premium on the option.
There are two possible outcomes for selling a put. One,
the option is in-the-money and exercised. As the option
writer you will obligated to purchase all the shares at the strike
price. The end result is much the same as if you had entered
a limit order at your entry price. The stock fell below your
target price and you purchased the shares. In either case you
established a long position (that is you own the stock) at your
entry price. The one difference is that by selling the put
option, you collect the option premium from the option
The second possible outcome from selling a put is that the
option is out-of-money. The option doesn't get
exercised. You are not obligated to purchase the stock.
Again, this is similar to a limit order where the stock didn't
reach your entry point. In both cases you do not end up
purchasing the stock because your entry price was too low.
But again you collect the premium for writing the contract.
As you've seen, selling puts can be used like a limit order to
establish a position in a stock. The put selling strategy
surpasses a limit order in that you profit by collecting the option
Option contracts are two sided contracts. There is an
option buyer and there is an option seller (also called an option
writer). The option writer collects the premium, but is then
bound to fulfill the contract when exercised.
You can write put options (or call options for that matter)
expecting that the option will expire out-of-the-money.
Out-of-the-money options are not exercised, and the option writer
is released from the contract at expiration. The option
writer profits the premium collected when the option was
The option open interest is used to determine at what strikes
you write a put option. For example, consider AAPL stock on
July 13th option expiration. The highest put open interest
was at the 595 strike. The highest call open interest was at
the 610 strike. Max pain theory states that hedge rebalancing
activities by the option writers (usually the market maker) will
cause the stock price to close with the highest open interest for
puts and calls. So, max pain predicted the stock price would
fall between 595 and 610. Based on that conclusion, selling a
590 put would have been below the 595 strike and therefore unlikely
to get exercised.
A put option is a derivative. It is the short equivalent
of a call option.
Shorting a stock is taking a position that the stock price will
fall. For example, imagine stock XYZ trades at $20 per
share. You believe the stock will fall. You decide to
short 100 shares of the stock. You contact your broker, and
the broker loans you 100 shares of XYZ stock. You immediately
sell those shares at the $20 price, gaining $2,000. A week
passes and XYZ falls to price of $15. You decide to close
your short. You purchase 100 shares of XYZ in order to return
the loan to your broker. The total cost is $1,500.
Subtracting the cost of $1,500 from the $2,000 gain leaves you with
a profit of $500.
A call option is the right to purchase 100 shares of a stock at
the strike price on or before the maturity date. Conversely a
put option is the right to sell 100 shares a stock at the strike
price on or before the maturity date. In other words, the put
option is a leveraged short position.
Consider stock XYZ again, with a price of $20. A put
option at the $20 strike gives the buyer the right to sell XYZ at
$20, while the option writer must buy XYZ at $20.
The put options with a $20 strike are at-the-money. This
means the put option has no intrinsic value since the stock can be
sold at the $20 strike. The option premium is entirely
XYZ falls to a price of $15. The option buyer may purchase
100 shares at $15 for a cost of $1,500 and sell them to the
option writer at $20 for a gain of $2,000. Subtracting the
$1,500 cost from the $2,000 again leaves the option buyer with a
profit of $500.
Just like a call option, put options are two sided
contracts. There is a buyer and a seller (the seller is
called the option writer). The buyer is taking a short
position in the stock. The option writer is taking a long
position in the stock.
I recently had an email from "cswolfe" asking me what stock
tickers will return max pain data. The specific stock in
question was ZNGA.
This website gets all the option data from Yahoo Finance.
Any stock that reports option data on Yahoo Finance will be
available here. Using the ZNGA example, the Yahoo Finance
option data can be found at the link below.
Yahoo has a wonderful API that lets you query the option data
and return the results in the XML format. You need the full
Yahoo Query Language (YQL) syntax and OAuth, but the basic url is
The top of the max pain page or any other page is a "ticker"
textbox and "maturity" dropdown. You can type any stock
symbol into the ticker textbox. You can also select the
option expiration you want in the dropdown. A word of
caution, some stocks don't offer weekly options. If you
choose a maturity for a stock that doesn't exist (say a weekly
maturity), the dropdown will default to the first available option
Finally, all the graphs and charts include the stock ticker and
option expiration date. That way there is no confusion about
what graph you are viewing.
I got an email question from someone learning about
options. They asked me "wouldn't the max pain strike price
within the expiration time frame be a variable value?"
Max pain may change from day to day. You'll find it
happens often with the weeklies. Especially after the stock
makes a large move.
Max pain is based on the open interest. All publicly
available open interest data is posted only after the stock market
close. You get one max pain figure for the day and it will
stay there because open interest data isn't updated until the next
Intra-day you can try to determine direction from the volume
charts (volume data is published intra-day). But remember
that you don't know if contracts are opening or closing when you
look at volume.
Seeking Alpha contributer Rocco Pendola does an excellent job of
explaining max pain. He has posted several interviews with
experts where he directly asks about the forces behind max
pain. Rocco and the experts agree that hedge unwinding is the
major force behind max pain. But the articles themselves are
absolutely worth reading.
In the first article, Rocco interviews University of Illinois
Professor of Financial Markets and Options Neil Pearson. Neil
gives an excellent overview of the hedges established by the option
The second article is an interview with WhatTrading.com Senior
Options Strategist Frederic Ruffy. Fred and Rocco openly
question if it would even be possible to manipulate a stock to
close at max pain.