Max Pain Report For August 2008

This is a report of what happened at the end of options expiration.

The week started with DIA and SPY significantly off their Max Pain values, 3.3% and 2.1% respectively (please see the max pain live page). At the end of the week, these figures were down to -0.4% and 0.9%. This was quite remarkable. However, what also occurred is both stock prices and max pain values fluctuated. DIA went from $117.80 to $115.40 on Wednesday to $116.43 o Friday. DIA's max pain went from 114 to 115 on Tuesday, jumping 2 points to 117 on Friday. While the stock prices moved closer to MP, MP also moved closer to the prices on the expiration day.

The situation with SPY was similar. Stock price went from 130.71 to 130.57 to 130.17. Its max pain was steady at 128 all week, moving one point to 129 on Friday.

These changes throughout the week can be seen in the chart below, which shows the average difference between the stock price and the max pain value for DIA, SPY, XLF, and QQQ.



The following chart shows the final differences in $ (stock price - max pain value):



Clearly, max pain theory was correct this moth for DIA, SPY, XLB, and XLF. Clearly it did not work so well for XLE, GG and USO (energy ETF, gold miner and oil respectively, commodities which have suffered very significant declines in the last couple of weeks).

As for Max Pain theory, "one month a proof does not make". There seems to be indeed a magnet for prices somewhere. What can be said at this point is that Prices and max pain values do appear converge to each other.

In term of money and profits made. This was the situation for DIA at the end of the day on Friday:



This is what option writers made for several average premiums charged.



This is what the in the money options holders kept, and made, at the end of the day:



This was the situation for SPY at the end of the day on Friday:



This is what the SPY option writers made for several average premiums charged.



This is what the SPY in the money options holders kept, and made, at the end of the day:




These figures do not include the trades made on Friday itself, options buyers who cashed into their profits or any writers who simply locked into their profits by covering or buying back their options. The total number of options closed (which means open interest dropped) on Friday, as well as the $ traded is shown below:

DIA:



SPY:



It can clearly be seen that the $ traded on Friday were primary for calls: 68% for DIA and 76% for SPY. This makes sense as call holders do not want to exercise their rights (and buy a very large number of shares), but rather they just wish to cash into their profits by selling the calls.

The total $ value for SPY was $26M, again shared between buyers and writers. Since this constitutes a small fraction of the open interest $ we will add the amount traded for the calls to their profits. Remember this is just an estimate.

Therefore, at a $2 average premium, the DIA options writers made approximately $49M. The options buyers made approximately $27M . The SPY options writers faired even better making approximately $480M, while the options buyers made approximately $142M.

While these figures are approximations, it clearly pays to write options as opposed to buying them.


If you wish to track the max pain values for September, please visit the max pain page.