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.
The February 2014 monthly options expired on Friday 02/21. The
closing stock price on Friday was 525.25. The max pain value was
535. Did max pain miss? Yes. But in my opinion it still provided a
direction for AAPL.
Max pain is based on the MM rebalancing positions opened to
counter option contracts they had to write in order to make a
market. This takes effect during the last week of the option
contract. So, what happened during that last week?
We can see the history on Yahoo Finance
First, max pain predicted a drop in the price. On Friday 2/14
the stock closed at $543.99 and max pain was at $532.50.
Furthermore, max pain continued to be below the stock price until
the end of the day on Wednesday. Before the open on Thursday max
pain was at $537.50 and the stock had closed at $537.37. This is a
13 cents difference.
A short position would have been the correct trade in AAPL for
week. So while max pain failed to get the value exactly, it did
indicate a downtreand.
The open interest indicated a close below $540? Take a look at
the open interest graph.
AAPL had a large number of call contracts open at $540 (and also
$550). Had AAPL closed above $540, all of those contracts would
have been in the money. The MM would have to pay on all those
calls. Max pain theory says hedging by the MM against that would
apply pressure to keep the stock below $540.
This is very much what Travis Lewis advocates. He uses the
highest call and put OI as a range of highly probable close values.
I believe he indicates that he will sell calls beyond that and
collect the premium when they expire worthless. In this case, he
could have sold the $545 calls.
Friday is the January 10, 2014 weekly option expiration.
Max pain as of Thurday morning is 545. AAPL Stock is due to
close Thursday at about 536-537. That is a significant
difference. Let's paper trade this max pain value.
Unemployment numbers are out tomorrow. It is a situation
where a good number will be taken as a sign of stepping up the QE3
taper. A bad unemployment number would mean the FED continues
tapering at their current schedule. This report could sway
stocks big in either direction. Max pain works best in the
absence of other factors, so bear that in mind.
I am going to use a bull call spread. With the weekly
Op Ex tomorrow time decay will take a big bite otherwise. By
using the spread I neutralize the time decay.
The bull call spread for the 535-540 strike is a cost 2.7 in
premium. I will buy the 535 weekly calls. I will sell
the 540 weekly calls. If I invest $1,080 I can buy 4 spread
contracts. The break even point is 537.70. Assuming
both strikes are in the money at the close tomorrow, I will get
85.19% ROI. The profit would be 2.3 per contract. In
cash that is $920.
Of course, I could also trade the 540-545 strike. The
break even is a 540.93 stock price and the ROI is 437.63%.
But in case AAPL doesn't get to 545 and pins at 540 instead, I will
stay with the 535-540 spread
I'll come back at the close Friday and update the status of this
UPDATE FRIDAY 1/10
AAPL closed at 532.94. Both strikes are out-of-the-money,
so the position was a 100% loss.
The Unemployment number was bad this morning. It seems
that held influence on the markets all day. Max pain works
best when there is no other news driving stock price
this morning I posted the AAPL option max pain for the weekly Jan.
Pete O. replied to me, saying he would like to see a 515 stock
price as an entry point
The advice I gave Pete O was sell put options for the Jan. 10
expiration at the 515 strike. There are two possible outcomes from
One, the stock goes to 515 or lower. The option exercises and
Pete O. must buy AAPL stock at 515, which is the entry price he
wanted. Plus, he already collected the option premium
slightly reducing the cost of buying the stock.
Two, the stock price never reaches 515. The put options Pete O.
wrote expire worthless. Pete keeps the premium he collected as
If you identify a weekly strike price that you would like as an
entry point to establish a long position, selling or writing puts
is a strategy you can use. If Pete O. truly wants to
establish a long, he can try selling puts the following week until
he gets the long position he wanted.
On Thanksgiving 2013 this website will begin tweeting the weekly
max pain. You can follow us and get the weekly AAPL max pain
The purpose of the twitter account is to assist users like you
get the max pain value each day. The tweets themselves will
contain the weekly option max pain and the previous closing stock
price. It also includes the option expiration date. The
message itself will look like this.
Max Pain = 520.00. Maturity = 11/29/2013. Previous close =
You can see the recent tweets displayed on this page. Look over
to the blog navigation pane.
This website uses Yahoo Finance data to get the option open
interest. This data is posted prior to the market open each
day. The max pain value can be calculated before the market
open each day. Then, it is posted to twitter before the
market open each day.
For now, only the AAPL max pain is tweeted. It is possible
to tweet other stocks like GOOG or PLCN or NFLX. But first
we'd like to see what the response to tweeting the AAPL stock
is. Many visitors to this website own or are considering
buying AAPL stock. Apple is the most viewed stock on this
website. In addition, does it make sense to tweet all stocks
under the same account? Or would it better to establish an
account for each individual stock and let you follow only the
stocks you want to? The second option sounds good, but there
is the problem of managing multiple twitter accounts.
What do you think? Would you like to see various stock max
pain values? If so, what ticker symbols? Furthermore
would you like to see individual accounts for each stock?
This is a video explanation of max pain. It describes how max
pain can be used to predict the stock price upon option expiration.
In brief, max pain functions because of the hedge re-balancing by
the market maker who wrote/ sold the option contracts. For a more
detailed explanation, please watch the videw below or see the
various blog posts on this topic.
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.
For some reason, the monthly option expiration date is reported
as a Saturday. Weekly option expirations are reported as a
Friday. This is true of the Yahoo Finance data and the data
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