Saturday, September 19, 2009

Options Max Pain Theory: Busted

This is a follow-up to our post on Max Pain from earlier Friday.

Here is what happened to Max Pain theory (expiry day). It was fascinating to follow it in real-time. Prices were tracked live at our site. Here was the situation before the day started:

This was the status at 3:36PM:

And here is the status at the end of the day:

Prices converged somewhat to Max Pain values for some of the stocks: ABX (2.86% to 0.14%, the only stock to move within MP range), SLW (29.60% to 25.10%), SPY (4.04% to 3.61%), UNG (-6.0% to -3.00%), USO (1.32% to 0.32%), and XLF (1.40% to 0.93%).

However, prices moved the opposite way for DIA (1.09% to 1.13%), IWM (6.31% to 6.76%).

Significantly, we see that SLW finished just outside the 7.50 to 12.50 range, ending the day at $12.51. That is out of MP range by $0.01! Max Pain was irrelevant in this case. For DIA is was quite similar, finishing outside the range by $0.10!

This is no proof, but the MythBusters might have an opinion on this.

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