Max Pain - An answer I posted on my board on the FOOL this AM to the following question
Mish lets get this right, Max pain comes 12 times a year. twice a year it most likely fails. so 3 months are done with so far. this means that sometime between now and the end of summer most likely max pain will fail to the down side...
Twice a year it fails...hmmm... I have no stats on that
I wish I had data on this but I do not.
I only see the game I see now.
The game I see now is chop. Sometimes higher and sometimes lower. I see no reason for this not to continue. If it continues, then Max pain should continue to work.
Max pain can fail to the up side as well.
I bet it "failed" more often than twice a year in the bull market madness. I bet it failed to the downside quite often in the steepest part of the decline. Again I have no data and perhaps I am wrong. Those are hypothesies that I have no historical data to back up. I suppose even when BRCM JNPR etc were plunging thru the floor that MSFT INTC CSCO etc might have kept us pinned to max pain. Back in the heyday of madness I was not tracking Max pain on the QQQ's, nor did CSCO interest me much.
There is another important point to consider, and one on which I have no historical data. If more options are being played now than ever before, then we would be more likley to hit pain more often now than then. I have no stats on this unfortunately, but I bet these might be available from CBOE. I would like to see the monthly open interest figures for options on INTC QQQ MSFT INTC for the past 4 years. I suspect that options, particulary on the QQQ have increased dramatically but that is a pure guess.
Note that there is currently a huge April influx of IRA contributions that the the mutual funds are sitting on right now. This would portend for a strong move up. If it happens right now, from this base, we could easily exceed Max Pain in April. However, there is no reason why we can not continue sinking for a week or two before we have an explosive rally with all those funds. That rally takes us back up to max pain for April and then pushes to new insane heights on the Naz only to fall sharply to max pain in May. That is a very possible scenario, not necessarily my prediction, but one to be watching for. If it plays out exactly like that, we can hit Max pain 2 more months in a row even with a month long rally in the middle of it all.
I guess the criminally minded would consider the above scenario as having a very good chance. (Are the turnips giving weight to this scenario in the rally postponement and lowering of the bounce point?)
While we are on the subject of Max Pain, consider that although it can "fail" in that it is way off base at closing, that the powers that be (the option writers are not really losing anything ever, or hardly ever). Delta hedging comes into play. If people keep piling into puts and the market keeps sinking, then the writers of those options short to protect the options they wrote (this of course steepens the plunge until selling is totally exhausted) The calls expirte worthless and the puts are protected by short positions. Nothing lost and 1/2 gained. If we have a strong rally thru pain on the upside, the option writers go long and the puts expire worthless (again this steepens the rose as the writers have to go long in an advancing market to protect the calls they sold). Same thing. Nothing lost and 1/2 gained. I believe the ideal situation is for the crooks to collect both halves of the option pie, but even on a "failure" of pain to work, "da boys" are not losing anything IMHO.
Now sometimes, like this last month for example they do even better than collect both halves of the option pie. I am sure "da boys" went long at the bottom of the most recent plunge sold and shorted at the top, then dropped us back to max pain in a series of two quick gap downs. Options Speculation is what is driving the Naz right now IMHO. Everyone getting tired of the Naz whipsaws, as well as lies about the recovering economy is what is fueling the insane rise in the S&P and DOW (just plain equity speculation as opposed to options speculation, with money exiting the Naz and chasing the top in the DOW). Isn't this fun? Perhaps this is too criminally minded but that is how I see it.
M |
