Welcome

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. 

VIX Option Pain

The VIX option pain data is now available.  Several users have emailed us asking for the VIX option data.  If you are one of them, you'll pleased that the data is finally here.

Use the ticker symbol ^VIX to get the data.  It will default to the next monthly maturity date, but you will have the ability to select any available maturity.

The VIX is not a stock, but a derived value of the current market volatility.  Therefore the max pain value itself may not be useful.  Buying or selling the VIX or VIX options doesn't affect the market volatility.  So hedging won't affect the price.

But, the open interest is certaintly valuable.  The sheer number of open contracts is amazing.  For example, here is the 4/16/2014 maturity open interest.

There are a large number of stikes that have over 150,000 open contracts.  That volume even puts AAPL options to shame.  The AAPL April monthy maturity has one strike with 40,000 calls and one with 40,000 puts.  The rest are peanuts.  So even that 590 strike at 80,000 open contracts is just half of the options open on just one VIX strike. What does that mean?  It means there's an awful lot of money tied up in VIX options.

Plus, consider how many more calls are open than puts.  The put-call ratio is 0.40.  Many investors believe market volatility will go up.  Most of the calls are between the 17 and 25 strikes.  There is also a large number of 30 strike calls.

 



Max Pain and Open Interest

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

Date Price Max Pain
Friday 2/14 543.99 $532.50
Monday 2/17 Presidents Day $530.00
Tuesday 2/18 $545.99 $535.00
Wednesday 2/19 $537.37 $537.50
Thursday 2/20 $531.15 $537.50
Friday 2/21 $525.25 $535.00

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.

Trading weekly AAPL options

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 paper trade.

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

Using max pain to create a long position

On StockTwits.com this morning I posted the AAPL option max pain for the weekly Jan. 10 maturity.

  1. $AAPL  Max Pain = 550.00. Maturity = 01/10/2014. Previous close = 543.93.

Pete O. replied to me, saying he would like to see a 515 stock price as an entry point

@RioTwit  @maximum_pain_cm  would be a nice number to get in, don't think it will get down that low, thought I'm waiting & watching

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 this strategy.

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 profit.

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.

Max Pain now on Twitter

On Thanksgiving 2013 this website will begin tweeting the weekly max pain.  You can follow us and get the weekly AAPL max pain daily.

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.

Weekly AAPL Max Pain = 520.00. Maturity = 11/29/2013. Previous close = 528.50.

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?

Max Pain Video

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 Max Pain Jan 2013

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.

 

 AAPLMaxPainJan2013

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 strike?

Now, max pain wasn't 500.  It was 525.  There were a large number of open contracts not visible on this snippet of the graph.

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? 

 

Max Pain History

I'm pleased to announce the release of the max pain history page.   I received a number of requests for this data.

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.

Ticker Maturity Max Pain Stock Price Date
AAPL Fri 12/07/2012 560.0000 533.2500 Fri 12/07/2012
AAPL Fri 12/14/2012 540.0000 509.7900 Fri 12/14/2012
AAPL Sat 12/22/2012 550.0000 519.3300 Fri 12/21/2012
AAPL Fri 12/28/2012 520.0000 509.5900 Fri 12/28/2012

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 from Stricknet.

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

AAPL Max Pain History

I received a few requests for historical max pain values recently.  AAPL max pain history is the one most often requested.

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 fetch on-demand.

Maintaining AAPL max pain historical data is on the to-do list.  I will keep blof updated with my progress.