Pump's daily trading recs, emphasis on short selling Message Board

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Strategies & Market Trends : Pump's daily trading recs, emphasis on short selling

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To: Michail Shadkin who wrote (4419)	7/20/2001 9:45:17 PM
From: mishedlo	Read Replies (1) of 6873

Max Pain. I did a post on Max Pain and Michail asked me to comment on it for the benefit of the thread. (I hope this commentary is a benefit). Apologies to those already using this tool. Max Pain is simply the point where the most options expire worthless (on a stock by stock basis). Here is the website: iqauto.com Best example I could ever give is today. INTC. We have seen stocks run on crap like their earnings and we have seen the opposite. I predicted a close at $30 +- a nickel. Well that call looks pretty good. If you look at the open interest in options on INTC I hope everyone gets a chance to see this before they are cleared this weekend... cboe.com That entire slate of options at 30 expired worthless. All the puts and all the calls. In addition all the calls above 30 are worthless as well. This is why you often hear 80% of options expire worthless. In this case, so many people betting on INTC BOTH ways (more on than against so we closed slightly below LOL) that they pinned it exactly at 30. I expected a small rally this afternoon just looking at INTC and a couple other things they needed to get a little higher, so the crooks could do their final adjustmenst as to where to close things. This one was so obvious I could PUKE. I did not follow Michail into NETA short because of max pain. It was 12. I do not like to bet against stocks in front of expiry that have a reasonable number of options open interest opposite of my play. It looked like a trap. All bets were against NETA. It really did not matter what NETA did, stock was probably not going to drop that far (except on a total disaster perhaps). That said..... PLEASE bear in mind Max Pain can and does fail miserably. One does not know at what point the powers to be hedged and if they are rooting (and hedged for the market to fall) then fall it will. Today in fact was one of the better performances as of late on Max Pain. Another problem with max pain is it looks at options as if they were all bought. If Calls were bought and PUTS were sold (The MMs have an enormous desire to drive things lower). I would GLADLY pay to see who was long and short. CBOE does not provide this. Just as short interest comes out only once a month, such info is too valuable to share. Also, if Joe Six Pack (retail investor) is heavy on one side and institutions the other, J6P will get crushed regardless of pain. In general it seems to work out as options are usually bought not sold. Some find it so unreliable that they do not use it at all. That said, it is my belief that it is far far better to have pain on your side than against close to expiry. It usually will prevent nonsense. Pretty big position in PMCS strike 30 calls. Hardly any strike 30 puts. PMCS gets clobbered on earnings but BRCM did not. Why.... cause BRCM max pain was about 40. PMCS all options in one direction. Please do not attempt to use Max Pain on thinly optioned issues. IT IS WORTHLESS. I have not figured out the amount of open interest it takes but someone pointed out how far something was below max pain (I believe it was NETE) and my reply was who cares. Never discount the fact that the news is known in advance and already hedged in the direction the news will go. Look at the false breakout and gap ups yesterday on BRCM, PMCS etc, when they know full well what they are going to do with them regardless of earnings. Everyone with a clue knew PMCS would have crappy earnings, Max pain suggested how the market would react. This is just another tool, and a handy way to look at things starting about 10 days in front of expiry when things start to trend towards pain. M

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