Max Pain
The stocks that matter the most are
QQQ - on the nose
INTC - hit and fell thru max pain at 32.5 on Wed
plenty of time for the powers that be to short above 32 1/2 and just let it drop. Note: This particular behavior has happened 3 expiry's in a row (not necessarily on intc but on some other highly optioned issue) so it should not come as any surprise.
MSFT - Max pain was at 60 but a fall from 65 to below 62 in a few days on MSFT is a pretty damn big move down for MSFT. Notice too the "suspicious" downgrade and subsequent gap down and plunge.
CSCO - Finished above pain at 15 but there are far more puts than calls at 15 if I recall correctly. Thus one would expect it to finish on the plus side of pain. It did.
These stocks drive the market, not EMLX and BEAS.
QQQ is much of the market in fact
Two weeks ago we rallied from QQQ 33-34 to 39 in a series of gap ups. That is one hell of a rally at late notice to exceed pain. Many/most stocks went above pain and fell back thru it during expiry week, or in the case of QQQ stopped on a dime.
Look at the behavior of other reasonably heavy optioned stocks.
SEBL for example. Rose above, fell slightly back thru. Also note that there are more calls than puts at strike 35 so one would expect the error to be on the "-" side (below 35).
Trying to compare EMLX with 4,000 options on it to QQQ with 200,000 options on it (20,000,000 shares controlling interest) is absurd. Those 200K options is for strike 37 alone! I have not added up the other close by strikes.
A quick look at this will tell you the absurdity of trying to figure out with any reliability what EMLX may or may not do, in comparison to what QQQ will do.
As far as I am concerned it was a near PERFECT close for max pain. From QQQ alone one would have to admit that.
Add in the INTC crossover on wed where puts got toasted all the way up, and late call buyers in that last runup got toasted and the crossover should not be unexpected. Like I said, my definition of max pain is if it hits during expiry week.
Yes this is not the true definition. But on true definition the QQQ's were bang on, nearly to the penny.
Now, let's look at INTC again.
45K puts and Calls both at strike 32 1/2.
It would tend to hover around that price.
58K vs 13K calls to puts at strike 35.
No way in hell could INTC close above 35.
INTC rose to 34 and turned down hard and fast.
IMHO "da boys" shorted as much of the stuff as they could at 33-34 then let the bottom fall out.
Since this was done on tuesday and Thursday of expiry week, there was almost no time premium left in the strike 32 1/2 options. A perfect hedge and no real incentive for INTC to stop at 32 1/2 on the way back thru. Any fall from that point was covered with shorts and the calls were toast. Still 31.74 was a reasonable close for pain. Given the rally from 28 or wherevever, the overshot to "allow" short hedging to take place, then a small overcorrection the other way. Perfection IMHO.
Take a look at CSCO.
Although "official" max pain was 15, there were way more puts than calls at 15 and way more calls than puts at 17 1/2. Thus one would expect (at least I would), for any error in max pain to be on the + side of 15. Voilla. CSCO closed at 16.54.
Finally, take into consideration that we do not know who is long or short the options, all we see is open interest. If a small player or group of small players is short the options (covered calls for example) then the MMs own the options rather than sold them. That changes the "TRUE" nature of pain. Unfortunately this discrepancy can not be figured out. It is impossible.
The greater the open interest, the less likely (IMO) for there to be an influence of this kind. If looking at some stock with 10K options, if all the calls are covered calls that is a vastly different situation than if J6P owns the calls. In the first situation, the MMs would want to drive the stock up to call them away, in the second the MMs just want the calls to go worthless.
I am a believer that "TRUE PAIN" which can never be calculated becasue we do not know who was long and who was short, is hit on the big plays within a few %, in most cases where the market is sideways like it has been.
If one can predict the nature of the move, or at least the direction, then one has (or should have) an idea where the overall market is going. Last week that direction was up (when we were below pain). Monday and tuesday it was down when we were above.
Delta hedging on the crossovers like INTC and SEBL caused some stocks to finish lower. Not a dis-proof of max pain IMHO.
BEAS is totally irrelevant and max pain on it is likely noise. That said, even these smaller plays can produce startling results. JNPR for example. 3-4 day plunge just as the bulls are taunting softie over this. I did a check today and found a large number of calls in relation to puts at 10, 12 1/2 and 15. Well, when the move in a sector is going in the direction of the QQQ's, one must figure that as many of these as possible are going to get taken out. JNPR go hammered. EMLX was below pain, but in a weak sector, AND a market trending down. For EMLX to fight that (on the basis of max pain) would have taken a miracle.
Max pain was a Huge huge winner this month.
No doubt about it. It called the rally as well as the turn down. QQQ's hit on a dime.
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