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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

Explain max pain

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Manually calculating Max Pain

I was recently asked by a visitor to this website to demonstrate how to calculate max pain for a specific ticker and expiration. The ticker was the SPY ETF and last Friday 12/12/14 was the option expiration. He had calculated max pain himself and his results did not match my values.

I manually did the calculations in Excel for SPY. I'd like to share my results with all of you. This post demonstrates exactly how I calculate max pain for any ticker and expiration. You may download my Excel File.

First, I use either Yahoo Finance or Google Finance as a data source. The Raw Data section of this website shows that data, although in a slightly compiled form. The data for our example is in the table below. It contains the call and put cash values, but let's ignore those for now. They are the values we will calculate. What is important in this table is (1) the various strike prices and (2) the call and put open interest.

&nbspPutCallTotal
StrikeOICashOICashCash% Diff
165.00 6,084 3,500,582,850 0 0 3,500,582,850 6453.60
170.00 37,023 2,976,240,850 0 0 2,976,240,850 5471.96
175.00 30,099 2,470,410,350 0 0 2,470,410,350 4524.97
180.00 37,863 1,979,629,350 18 0 1,979,629,350 3606.15
185.00 9,911 1,507,779,850 54 9,000 1,507,788,850 2722.80
188.00 4,145 1,227,643,450 0 30,600 1,227,674,050 2198.38
189.00 3,943 1,134,679,150 15 37,800 1,134,716,950 2024.36
190.00 25,073 1,042,109,150 1,034 46,500 1,042,155,650 1851.07
190.50 5,591 997,077,800 10 102,550 997,180,350 1766.87
191.00 14,414 952,326,000 11 159,100 952,485,100 1683.19
191.50 2,122 908,294,900 10 216,200 908,511,100 1600.87
192.00 21,560 864,369,900 1,030 273,800 864,643,700 1518.74
192.50 1,940 821,522,900 5 382,900 821,905,800 1438.73
193.00 16,053 778,772,900 240 492,250 779,265,150 1358.90
193.50 15,769 736,825,550 23 613,600 737,439,150 1280.59
194.00 12,422 695,666,650 10 736,100 696,402,750 1203.77
194.50 12,599 655,128,850 8 859,100 655,987,950 1128.10
195.00 13,315 615,221,000 561 982,500 616,203,500 1053.62
195.50 5,855 575,978,900 16 1,133,950 577,112,850 980.44
196.00 4,640 537,029,550 110 1,286,200 538,315,750 907.81
196.50 27,035 498,312,200 101 1,443,950 499,756,150 835.62
197.00 18,229 460,946,600 287 1,606,750 462,553,350 765.97
197.50 4,244 424,492,450 190 1,783,900 426,276,350 698.05
198.00 26,342 388,250,500 1,429 1,970,550 390,221,050 630.55
198.50 6,034 353,325,650 270 2,228,650 355,554,300 565.65
199.00 32,610 318,702,500 682 2,500,250 321,202,750 501.34
199.50 5,369 285,709,850 813 2,805,950 288,515,800 440.14
200.00 43,275 252,985,650 1,196 3,152,300 256,137,950 379.53
200.50 20,198 222,425,200 2,022 3,558,450 225,983,650 323.07
201.00 65,817 192,874,650 1,505 4,065,700 196,940,350 268.70
201.50 32,383 166,614,950 809 4,648,200 171,263,150 220.63
202.00 62,033 141,974,400 4,159 5,271,150 147,245,550 175.67
202.50 25,772 120,435,500 3,068 6,102,050 126,537,550 136.90
203.00 48,230 100,185,200 3,956 7,086,350 107,271,550 100.83
203.50 17,519 82,346,400 4,806 8,268,450 90,614,850 69.64
204.00 67,277 65,383,550 52,697 9,690,850 75,074,400 40.55
204.50 18,192 51,784,550 12,264 13,748,100 65,532,650 22.69
205.00 54,255 39,095,150 40,874 18,418,550 57,513,700 7.67
205.50 39,024 29,118,500 9,495 25,132,700 54,251,200 1.57
206.00 30,320 21,093,050 32,689 32,321,600 53,414,650 0.00
206.50 12,601 14,583,600 15,878 41,144,950 55,728,550 4.33
207.00 51,520 8,704,200 42,363 50,762,200 59,466,400 11.33
207.50 17,428 5,400,800 40,765 62,497,600 67,898,400 27.12
208.00 20,493 2,968,800 37,932 76,271,250 79,240,050 48.35
208.50 10,161 1,561,450 17,774 91,941,500 93,502,950 75.05
209.00 13,230 662,150 33,854 108,500,450 109,162,600 104.37
209.50 813 424,350 12,156 126,752,100 127,176,450 138.09
210.00 2,512 227,200 66,509 145,611,550 145,838,750 173.03
210.50 363 155,650 17,499 167,796,450 167,952,100 214.43
211.00 422 102,250 29,648 190,856,300 190,958,550 257.50
211.50 314 69,950 30,605 215,398,550 215,468,500 303.39
212.00 137 53,350 25,742 241,471,050 241,524,400 352.17
212.50 51 43,600 22,445 268,830,650 268,874,250 403.37
213.00 62 36,400 2,786 297,312,500 297,348,900 456.68
213.50 0 32,300 1,033 325,933,650 325,965,950 510.26
214.00 0 28,200 1,140 354,606,450 354,634,650 563.93
214.50 0 24,100 1,085 383,336,250 383,360,350 617.71
215.00 42 20,000 5,076 412,120,300 412,140,300 671.59
215.50 0 18,000 27 441,158,150 441,176,150 725.95
216.00 0 16,000 171 470,197,350 470,213,350 780.31
217.00 0 12,000 180 528,292,850 528,304,850 889.06
217.50 0 10,000 775 557,349,600 557,359,600 943.46
218.00 0 8,000 3,077 586,445,100 586,453,100 997.93
219.00 0 4,000 4,020 644,943,800 644,947,800 1107.44
220.00 40 0 1,846 703,844,500 703,844,500 1217.70
221.00 0 0 92 762,929,800 762,929,800 1328.32
222.00 0 0 1,276 822,024,300 822,024,300 1438.95
222.50 0 0 28 851,635,350 851,635,350 1494.39
225.00 0 0 0 999,697,600 999,697,600 1771.58
227.50 0 0 4 1,147,759,850 1,147,759,850 2048.77
230.00 0 0 2 1,295,823,100 1,295,823,100 2325.97

The next step is to go through each individual strike price, assume it's the close price on the expiration and calculate what each of the open contracts would be worth at that close. It's easier to work the calls and puts separately. We will start with the calls.

The intrinsic value is all that is left on expiration for an option. For a call option, you find the intrinsic value from the close price minus the strike price. After you have the intrinsic value, you multiply by the open interest which is the number of open contracts. Finally, you multiple by 100 shares in each contract. This gives you the value of the call options. Keep in if the strike is above the close, the option has zero intrinsic value.

([Close Price] - [Strike]) x [Open Interest] x 100

As we see in the image to the right, if the SPY price were to drop to 185, nearly all the calls would expire worthless. The only calls to have any value would be the 18 calls at the 180 strike. Using the formula, the cash value of the calls would be (185-180) x 18 x 100 = 9,000.

If it were to close at 188, then the 180 calls and 185 calls would have some value. The 180 strike has a value of (188-180) x 18 x 100 = 14,400. The 185 strike has a value of (188-185) x 54 x 100 = 16,200. The total value of all the calls is 14,400 + 16,200 = 30,600.

You simply keep going like this through all the strikes. This is the part where C# or Excel comes in handy.

Please note that if you look back at the data table, the call cash value at 185 and 188 strikes is 9,000 and 30,600 respectively. These are the values we just calculated by hand.

Puts are just a little different. They don't have intrinsic value until the stock price is below the strike price. The formula for puts is

([Strike] - [Close Price]) x [Open Interest] x 100

For example, if SPY closed at 165, the 170 strike puts have the value (170-165) x 37,023 x 100 = 18,511,500.

The 175, 180, 185 puts and so on also have value, but I'm not going to do those all here. Again, C# or Excel is very useful.

After all of this, we need the total call cash and total put cash at each strike. These values are the green call bars and red put bars on the max pain charts. Max pain is the strike where the least amount of calls and puts have value. For the SPY 12/12/14 options, this was the 206 strike price.

You may download the Excel File showing all of the calculations.

Open Interest Walls

Open Interest walls or OI walls are similar concept to max pain.  Both rely on the option writer, which is the market maker, hedging the options he wrote.

For max pain, you use the cash value at each strike to see where the option writer should lose the least amount of money.  You expect his hedgin activity to drive the stock price to that point.

OI walls are different in that they provide a range of possible values for the close.  For example, consider the following chart.

Open Interest Wall

The max pain strike price is 320.  A close below 320 means that 1,800 put options at 320 would be in the money.  Similarly a close above 320 means some 1,800 call options at 320 would be in the money.

The OI walls are at 300 and 330.  The 300 strike has the highest number of puts at 2,800 contracts.  The 330 strike has the highest number of calls at 2,600 contracts.

Should the stock price move toward the 330 price, the option writer / market maker would be paying out on a significant amount of calls.  He will rebalance his hedge in the common stock to compensate.  That rebalancing will apply pressure to keep the stock below 330.  So the 330 strike can thought of as a "wall" that the stock should not move past.

Should the stock price move dramatically toward the 300 price, the same thing will happen.  In fact, looking at the large number of puts all the way from 320 down to 300 there should be more pressure to keep the price above the 300 than below 330.

For this example, the OI walls are predicting a close between 300 and 330.  AMZN closed at 311.39 on Friday 10/10/2014.  This is within the OI walls.

The benefit of using OI walls is that it has a higher probability of success than max pain.  Max pain is predicting an exact close.  OI walls says the close will be within a range of values.

How can you use this to your advantage?  The iron condor is an option strategy that relies on the stock price to remain within a range.  The OI walls can be used to define what range the stock will remain in.  You can establish the iron condor on these values.

Which stocks have the highest option open interest?

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.

AAPL under $100

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 factor.

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

tickermaturitydatecall contracts
AAPL 06/27/2014 06/23/2014 256836
AAPL 06/27/2014 06/24/2014 294962
AAPL 06/27/2014 06/25/2014 311051
AAPL 06/27/2014 06/26/2014 341150
AAPL 06/27/2014 06/27/2014 335331
AAPL 07/03/2014 06/30/2014 186816
BAC 06/27/2014 06/23/2014 56140
BAC 06/27/2014 06/24/2014 64057
BAC 06/27/2014 06/25/2014 65526
BAC 06/27/2014 06/26/2014 68216
BAC 06/27/2014 06/27/2014 71478
BAC 07/03/2014 06/30/2014 52024
CBS 06/27/2014 06/23/2014 86923
CBS 06/27/2014 06/24/2014 88421
CBS 06/27/2014 06/25/2014 89236
CBS 06/27/2014 06/26/2014 92535
CBS 06/27/2014 06/27/2014 92688
CBS 07/03/2014 06/30/2014 78011
F 07/03/2014 06/30/2014 53832
MU 06/27/2014 06/23/2014 57350
MU 06/27/2014 06/24/2014 87156
MU 06/27/2014 06/25/2014 83623
MU 06/27/2014 06/26/2014 83120
MU 06/27/2014 06/27/2014 79370
NKE 06/27/2014 06/26/2014 50817
NKE 06/27/2014 06/27/2014 60921
QQQ 06/27/2014 06/24/2014 58479
QQQ 06/27/2014 06/25/2014 61581
QQQ 06/27/2014 06/26/2014 67700
QQQ 06/27/2014 06/27/2014 65125
QQQ 07/03/2014 06/30/2014 50163
YHOO 06/27/2014 06/25/2014 50147
YHOO 06/27/2014 06/26/2014 53784
YHOO 06/27/2014 06/27/2014 57216

AAPL Stock Split and Max Pain

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

Why is AAPL usually up on Mondays?

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.

Weekday Date Open Close Difference Percent
Fri 9-May-14 584.54 585.54    
Mon 5-May-14 590.14 600.96 8.38 1.394
Fri 2-May-14 592.34 592.58    
Mon 28-Apr-14 572.8 594.09 22.15 3.728
Fri 25-Apr-14 564.53 571.94    
Mon 21-Apr-14 525.34 531.17 6.23 1.173
Mon 14-Apr-14 521.9 521.68 2.07 0.397
Fri 11-Apr-14 519 519.61    
Mon 7-Apr-14 528.02 523.47 -8.35 -1.595
Fri 4-Apr-14 539.81 531.82    
Mon 31-Mar-14 539.23 536.74 -0.12 -0.022
Fri 28-Mar-14 538.32 536.86    
Mon 24-Mar-14 538.42 539.19 6.32 1.172
Fri 21-Mar-14 531.93 532.87    
Mon 17-Mar-14 527.7 526.74 2.05 0.389
Fri 14-Mar-14 528.79 524.69    
Mon 10-Mar-14 528.36 530.92 0.48 0.090
Fri 7-Mar-14 531.09 530.44    
Mon 3-Mar-14 523.42 527.76 1.52 0.288
Fri 28-Feb-14 529.08 526.24    
Mon 24-Feb-14 523.15 527.55 2.3 0.436
Fri 21-Feb-14 532.79 525.25    
Fri 14-Feb-14 542.47 543.99    
Mon 10-Feb-14 518.66 528.99 9.31 1.760
Fri 7-Feb-14 521.38 519.68    

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.

  1. Retail investors purchase weekly option contracts on Monday.
  2. The AAPL market maker (MM) Goldman Sachs writes these options as a function of making a market.
  3. The MM now has a short position that will result in losses if the stock goes up.
  4. The MM buys shares of AAPL stock to offset the short option position.
  5. The stock price moves up on Monday.

Then consider this chain of events on Friday.

  1. Retail investors close out weekly option contracts on Friday.
  2. The MM no longer has a short option position.
  3. The MM sells the long stock position balancing the options.
  4. The MM buys shares of AAPL stock to offset the short option position.
  5. The stock price moves down 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 risk.

Historical Max Pain

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.

VIX Option Max Pain

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.

 

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.