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.
See todays max pain
I've traded AAPL successfully throughout 2014 using the principals of max pain. Or more accurately, the Poormans algorithm. That algorithm relies on the same basic idea, that when investors buy option contracts, the MM buys the stock. Conversely when investors sell the option contracts or they expire, the MM sells the stock.
What really determines where max pain will have an effect is the number of open contracts. The larger the number of contracts, the larger the MM position in the stock. It follows that larger the MM position, the more effect activity in that position affects the stock price.
AAPL is usually the top stock in number of open option contracts. But are there other stocks with a high amount of open options? Or, could AAPL go through a period of time without much option open interest? If I knew what stocks had high amounts of open interest, I would know which were morely likely to be affect by max pain or the poormans algorithm.
That's why I introduced the High Open Interest Chart. This chart can be used to determine which stocks have more than 50,000 open Call contracts across all strikes. Monthly options have more volume than weekly options, so the monthly numbers is 200,000 open Calls. Now you can see at a glance which stocks have a large number of option contracts for any week.
It is a few weeks after the AAPL split and how do the AAPL
options look? Well, the open interest is quite varied. In short, it
probably needs a few more weeks to settle. The 6/27 expiration saw
open interest around the 300,000 call contracts. But the monthly
6/21 expiration had 1,600,000 call open contracts. AAPL appears so
far to be maintaining enough open contracts to make max pain a
The interesting question is if NFLX, PCLN and GOOG don't have
the open interest AAPL does, are they other stocks thats do? BAC,
CBS, MU and YHOO all have open interest of 50,000 contracts or more
for the 6/27 or 7/3 expiration dates. None of them have over
100,000 open contracts, much less the 300,000 AAPL had for 6/27
Apple stock will split 7 shares for 1 over the weekend of June 7, 2014. Apple is the poster child for max pain theory. What does the stock split for max pain?
Apple is the poster child for max pain theory due to the large number of option contracts traded. Consider the following chart that shows the call option open interest in both weekly and monthly options from late April 2014 to early June 2014. Apple is the blue line, GOOG is the purple line, and NetFlix (NFLX) and Priceline (PCLN) are red and green respectively. I choose to compare these stock because they are all high profile tech stocks with a steep share price.
The chart shows the sum of all call option contracts from 5 days before expiration to expiration. Then the next week begins.
May 17 was the monthly option expiration and thus there is an increase in open contracts.
A quick glance shows Apple averages 80,000 contracts over this period. NFLX and PCLN average about 20,000. Apple trades 4 times more options than the other stocks.
More options traded means a large hedge in the stock by the option writers. The larger the hedge, the larger the effect on the the stock price.
The question is what happens to the number of AAPL options traded after the split? If there is a drop in the number of options traded, the max pain effect should lessen. This would be bad news for both max pain theory and the poormans algorithm.
show the data
Ever notice how AAPL almost always closes higher on Mondays?
Take a look at the Friday and Monday closes from February to mid
May of 2014.
I have to give credit to Travis Sago at aaplpain.com
for pointing this out. Travis goes on to propose a theory as to why
AAPL behaves this way. It can be summarized as the tail (weekly
options) wagging the dog (stock price).
Weekly options are generally opened at the beginning of the
week. For AAPL the pattern indicates that is Monday. Consider the
following chain of events.
Then consider this chain of events on Friday.
This is very similar to max pain theory. Both rely on the MM
buying and selling stock to offset an option position. It is
important to note that more call options are purchased every week
compared to put options. This means the overall option position of
the MM is short.
The reason Travis focuses on AAPL is because it trades more
weekly options than any other stock.
What does this mean for you? It simply means you can buy AAPL at
the close on Friday and sell AAPL at the close on Monday and
statistically have more gains than losses. It also means tht you
are holding AAPL for a very short amount of time and thus reduce
A great number of people have asked about the historical max pain values. Recent;y this website has begun recording the daily AAPL max pain values and comparing them with the daily stock price.
Currently, only AAPL stock has this historical max pain data. Why? The data for this website is gathered on demand from Yahoo finance. This means no one requests the max pain value for a particular stock one day, then there would be no value to record. Second, there are storage space concerns when attepting to store such data for every stock ticker.
I choose AAPL stock because it is the poster child for max pain. AAPL trades more options than any other stock. More option contracts means more common stock bought as a hedge by the option writer. A larger hedge has more effect on the stock price when it is rebalanced.
That said, how is AAPL doing? Here is the chart for mid March to mid April. The unbroken gray line is the stock price. The broken blue line indicates the max pain for that week.
On Friday 3/21/2014, Firday 3/28/2014 and Friday 4/18/2014 max pain was correct. On Friday 4/4/2014 and Friday 4/11/2014 it was incorrect. The week of 4/4/2014 was the week where the Russian and Ukraine conflict arose, driving down stocks Thursday and Friday.
The VIX option max 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.
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.