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.