Each month, on the Tuesday before the third Friday of the month, we hold our options “Max Pain” webinar, where our Chief Market Strategist Tom Bowley shares his thoughts with our members on where the major indexes and certain stocks might be headed based on outstanding calls and puts. Generally, Tom focuses on the SPY and QQQ, along with a number of stocks that are showing a significant imbalance — i.e., a high ratio of calls to puts or puts to calls — as options expiration Friday nears.
The term “Max Pain” is meant to describe the greatest negative financial impact that is felt by those holding call or put positions at expiration. In other words, a manipulation of stock prices by Market Makers who stand to benefit financially by the pain inflicted on individuals who are holding options into expiration. The Max Pain webinar is really meant to serve as a directional lesson for our members, especially those who tend to be short term traders.
For example, we saw a large imbalance of calls to puts on the QQQ (many more puts than calls) set to expire this past Friday. Since we see a large imbalance as a “contrarian indicator,” we alerted our members that there was a strong chance we could see a pullback by week’s end, which is exactly what happened. In fact, the QQQs were trading as high as $334.42 the day of our webinar and as low as $322.08, as you can see in the chart below.
Even though the move in the QQQs wasn’t huge, it does show that the large imbalance of calls to puts resulted in a directional move to the downside. And we saw this in a number of individual stocks we shared with our members. For example, Docusign (DOCU) was trading as high as $75.81 the day of our webinar, and our Vice President of Operations, Erin Webber, calculated that Max Pain on DOCU would be $67.73. It closed Friday below that level at $65.92, a drop of almost 14% in just a few days.
Does every Max Pain candidate work out? Of course not. Again, it’s meant to alert our members that the market could be setting up to move in a certain direction. However, you might be surprised to see the results each month that show the power Market Makers have over directional price. In fact, if you would like to see the Max Pain spread sheet Erin put together for our members heading into the week. just click here to sign up for our highly educational EarningsBeats Digest (EBD) and you will get Tom’s valuable market insights every M, W and F.
One final thing. We’ve noticed through our studies that Max Pain often bleeds into the beginning of the following week as option positions are settled. So it will be interesting to see what transpires early next week.
At your service,