Doug,
QQQ Max Pain point is at the 60 strike, with QQQ closing today at 57 1/4, so it is very close (less than 5% difference). However, QQQ trades options with strikes at 57, 58, 59, and 60. The dollar amount of these intervening contracts is $433,809,200, equivalent to 7,577,453 shares. This represents only 15% of the average daily volume in QQQ.
I've done some more thinking about all this. I figure that the probability that a stock will move towards the Max Pain point is directly related to the magnitude of the difference between the Max Pain point and the price the stock is currently trading at. This is conceptually just like the observation that the further away from, say, the 10 day ema a stock is trading at, the stronger the tendency for it to get "pulled" back towards the 10 day ema. But in the case of a stock price, this is just a statistical, probabilistic statement (or, at best, a semi-quantitative description of the probable outcome of the bull/bear battle), whereas for options, there will be a concerted effort to actively move the stock price towards the Max Pain point.
It is also related to the amount of shares "at stake", i.e., controlled by the options contracts between, so that if this amount is large, there will be more motivation to manipulate the price from the options pits. But their ability to do so is only significant if this number is comparable to the average daily volume the stock trades. If there's only 100 contracts at stake, and these control 100,000 shares, but the stock trades 5 million shares a day average, then obviously the options manipulations will pale in comparison to the manipulation arising from non-options related sources, and so be insignificant. But if there's 100,000 contracts "at stake", controlling 10 million shares in a stock that trades 5 million shares a day, then the options related manipulation should be a much more significant determinant of the stock price.
In other words, the tendency of a stock to gravitate towards the Max Pain point could be described by a simple product:
(Current Price - Max Pain) x (Shares at stake/average daily volume)
Let's call this the Options Manipulation Product or OMP for short. The higher the OMP, the greater the strength of the tendency for the stock price to "gravitate" towards the Max Pain strike.
From Greg's stocks and QQQ, the ones with the highest OMP are, in order:
1. ORCL: 37.0
2. BRCM: 26.0
3. WMI: 12.0
4. QCOM: 8.0
5. JNPR: 6.4
6. EMC: 3.1
QQQ: 0.91
(For QQQ, I used Friday's closing price in the calculation, so you could compare it to the others, which also use Friday's closing price).
So, the above stocks should have the strongest tendency to move towards their Max Pain points.
From my previous post about this
Message 15140387
keep in mind that
ORCL is 25% above the Max Pain point
BRCM is 32% below the Max Pain point
WMI is 27% above the Max Pain point
QCOM is 8% above the Max Pain point
JNPR is 23% below the Max Pain point
EMC is 5% below the Max Pain point
So, of this list, it would appear that ORCL and WMI might be good shorts, and BRCM and JNPR good longs.
All this assumes, for simplicity, the options chains are static, which of course is not true. It also assumes the Max Pain points remain static, which is not necessarily true either (but can be easily re-assessed, which I plan to do). The moves in these stocks suggested could be accomplished by moving the stock price, the Max Pain point, or both. Still, all else being equal, from the Max Pain perspective only, BRCM and JNPR look like the best potential longs, and ORCL and WMI the best potential shorts.
T |
