Saturday, February 21, 2009

February Max Pain Update, Demystifying MaxPain

This is an update on Friday's post max pain in practice.

Options expiration day was one of the quietest ever. Stocks dropped all morning and staged a comeback attempt in mid afternoon. In the end, SPY dropped another $1 strike price, finishing in the $77s, enabling another 82,682 puts to become 'in the money', while only 11,881 calls became 'in the money'. IWM finished in the same $41 range where it was the prior day.

Puts activity yesterday:

Calls activity:

Note the huge trading volume (second last column) and the drop in open interest (last column) as the positions were closed.

Overall, max pain appears to have had had no effect this time around. The market makers and option writers collectively missed out on a very large amount of money. The 82+ thousand puts that became in the money were worth roughly $16M. The put writers, however, likely originally sold those puts at higher values much ahead of expiration and it cost them $0.50 to cover them . Based on our previous studies, those were originally sold at somewhere around $2 to $3. They just did not optimize their winnings.

This time around Max Pain was just a myth.

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1 comment:

Deming said...

"Options expiration day was one of the quietest ever."

Yes, indeed. I would hazard a guess that universal concern was with the health of the financials and the effect on the overall market. When will it end? How can it be corrected? Will it continue for a long, long time? Will markets continue to erode?

Obviously, major focus was elsewhere. This in itself is revealing of the perceived seriousness of this situation going into the weekend.


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