John,
The Max-Pain Point™ study I am conducting, of which the Max-Pain Point graphs I post on my web site are a part, is designed to determine if the Max-Pain Point calculation of the Open Interest positions can be used as an indicator of where the price of the underlying issue may be on expiry day.
This is a little like watching a chess board and trying to determine who will win and in how many moves based on the current position of the pieces. Well, I have found that the 'currently active' open interest ie the open interest evaluations during the current expiry month, seem to be the best indicators, when they work. I say when they work, because the Max-Pain™ effect is a second-order effect at best. It works in a calm, relatively stable market environment. Things like breaking news, world events, Greenspan, momentum buying/selling, tend to swamp out the 'attractor' effect that Max-Pain exerts. The concept of working 'in the calm' is an interesting condition because it seems to occur both on a 'sunny day' as well as in 'the eye of the storm'.
Have said that, I have chosen to look at the data only during the expiry month. Actually, usually about four to five weeks out from expiry. I begin the next cycle the week after an expiry occurs. I do not process the data further out because I feel that there are too many things that can pop up to dramatically sway the market conditions surrounding an index or stock.
Hope that helps.
Ben A.
ez-pnf.com |
