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 paper trade.
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