"Maximum Pain" is my new cynical approach to the market
My understanding of the concept is in its infancy stages. But I like it. This past year has made me believe more than anything else how tech stocks particularly are manipulated by "market forces."
I think the concept has particular value in the two weeks leading up to each month's options expiration date. But the concept can help in formulating a month-long plan.
For example, BRCD had a bit of a pre-split drop for no serious reason whatsoever, other than, of course, its high P/E ratio. Keep in mind, though, that it, like NTAP and QCOM, is a great company. Well, BRCD closed at 136 7/8 yesterday. Meaning that it split overnight at 68 7/16. The "MaxPain" on Jan01 options stood yesterday at 180 (split adjusted 90 today). That meant to me that BRCD had to cover some ground in the next month. It did so today, closing at 85 1/16. Incredible. "MaxPain" on it now stands at 85, as opposed to yesterday's 90. So there's no sense wasting money on any options (calls or puts). At least not right now. Give BRCD some time to get away from its point of "MaxPain."
Let's think about QCOM. It's "MaxPain" for Jan01 now stands at 65. It closed today at 85. Buying puts on QCOM now sounds like a damn good idea. Maybe let the Christmas holiday spirit move it up to 90 or so, again, and then think about puts in early January. There is no doubt in my mind that QCOM is one of the market's most manipulated stocks. The "houses" love to pump out appropriate news to support their actions. If "MaxPain" is at 65 in early January, then forces are going to push QCOM down to its "home" at 65.
NTAP closed at 68 7/8 today. Its "MaxPain" for Jan01 options now stands at 60. It may not have much upward staying power in it. An idea would be to buy stock and cover it immediately to take the premiums. Doing the same right now with BRCD might not be a bad idea.
Remember, buying puts or calls costs money. So there needs to be a disparity between the trading price and the "MaxPain" point. Looking for these serious disparities is the crux to the matter. QCOM is the one right now that shows the most serious disparity. But I think it would be much better analyzed closer to options expiration day, say in mid January. Irrational moves away from "MaxPain" points such as BRCD's downward move on Thursday and QCOM's upward move today are the ones that present to best buying opportunities. Having bought calls on BRCD today, in retrospect, would have been appropriate. Buying puts on QCOM in the near future appears to be appropriate under the concept I'm formulating. One thing for sure, at least, is not to buy calls or puts in opposition to "MaxPain" points.
Here's the link again for "MaxPain" information: iqauto.com
Take care, John |
