Apple stock will split 7 shares for 1 over the weekend of June 7, 2014. Â Apple is the poster child for max pain theory. Â 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. Â 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. Â Apple is the blue line, GOOG is the purple line, and NetFlix (NFLX) and Priceline (PCLN) are red and green respectively. Â 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. Â 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. Â NFLX and PCLN average about 20,000. Â Apple trades 4 times more options than the other stocks.
More options traded means a large hedge in the stock by the option writers. Â 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? Â If there is a drop in the number of options traded, the max pain effect should lessen. Â This would be bad news for both max pain theory and the poormans algorithm.