Thursday, February 19, 2009

Max Pain for February, Price Convergence Watch

Options expiration is tomorrow Friday. Currently, max pain numbers are significantly higher than the corresponding stock prices. Here are the current max pain values compared to the stock prices:

SPY - Max Pain: 85, current price: 79.03, difference: 7.55%
DIA - Max Pain: 81, current price: 75.76, difference: 6.91%
IWM - Max Pain: 48, current price: 42.29, difference: 13.50%
XLF - Max Pain: 9, current price: 7.97, difference: 12.92%

With the recent significant declines in the stock market, max pain has not been accurate, as in accuracy of predicting the final price on expiration day. However, in general, the max pain value and the current price tend to converge to each other, at least partially, at expiration. If this holds, we would expect to see a sharp drop in max pain values and a rise in share prices.

Of the above, IWM is the most undervalued.

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