Maximum-Pain.com

See todays max pain

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 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? 

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.

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 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.

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 buyer. 

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 premium.

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 opened.

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 extrinsic value.

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.

http://finance.yahoo.com/q/op?s=ZNGA+Options

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 below.

http://query.yahooapis.com/v1/yql

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 expiration date.

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 day.

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 writers.

http://seekingalpha.com/article/270466-digging-deeper-options-expert-discusses-pinning-max-pain-and-apple-part-two

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.

http://seekingalpha.com/article/260747-interview-options-expert-frederic-ruffy-on-manipulation-and-the-options-market