Brad,
You comment that I wonder whether or not enough people follow this 'theory' that the trading of the actual shares themselves cause it (the 'theory') to become self fulfilling. I.E. People look for this 'max pain' number, and then trade shares to that price whether they are in options or not.
First, I have no doubt people play options themselves with the Maxpain point in mind--people have all sorts of odd reasons for buying and selling all sorts of things--but I'm trying to visualize how one would play the typically small moves stocks usually make during most options expiration weeks. For example, someone could have bought AOL August 100 puts yesterday when AOL was up and made over 100% on your money (I would never admit to having done such of thing because the fanatic AOL bulls would dance their Happy Dance all over my chest) but shorting the stock would have only gotten you 3-4%. Though the Inets were up yesterday and you could short them, it is often the case that a stock is drifting down toward the max pain point like AOL today, in which case it is difficult to short the stock, not to mention expensive.
As to whether professionals--say, NYSE specialists in AOL--keep an eye on the Maxpoint option point, I have no idea. I doubt it. Their job is to supply liquidity without going broke, a hard enough job without trying to push the stock in one direction or the other. What incentive does a NYSE specialist have to move the price to the Maxpain point? You got me. And Chicago Board Options Exchange option market makers, though they do buy and sell large amounts of stock to remain delta neutral, simply hedge existing option positions with the stock they buy or short on the NYSE, which again means they have little incentive to move the stock price since they are neutral.
Today, for example, AOL moved toward the Maxpain point and I would call it coincidence. Volume in AOL was very low and significantly so, a standard deviation below the volume of the past month. On low volume, stocks often drift off, no mystery there.
In other words, I don't really get the mechanics or the incentives of how and why people would "trade their shares too that price."
I may be missing something but I don't think so.
Best,
--Steve |
