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Strategies & Market Trends : Zeev's Turnips - No Politics
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To: Stockdoctor who wrote (48030)4/7/2002 12:18:55 AM
From: mishedlo  Read Replies (2) of 99280
 
www.cboe.com is what I use
here is a post explaining my method that I just did on my site on The FOOL.
The question was on CAT and how to figure pain.
=====================================================
CAT. There is not enough open interest to matter.
Open interest is simply the number of contracts.
I like to see at least 20K at a single strike before it matters. 20K is normally reliable but the more the better.

But lets take CAT and see.
First off go to www.cboe.com.
Type in CAT and make sure the "List all options" button is clicked otherwise you will just see the closest strikes.

My eye immediately gravitates towards the biggest numbers.
In this case it is Apr 55 and apr 60.
Now play a mental "what if" game.
What happens if CAT closes at 60?
Well those 60 calls go up in smoke but the 55 calls are 5 points in the money. At 55 the calls at 55 and 60 go up in smoke as well as the puts at 55. There are barely 1000 TOTAL puts that will finish in the money at 55, but that 55 close will kill 4000+ calls as well as almost 2000 puts.

Ding ding. In seconds we instantly see that max pain is 55.
A quick confirmation on iqauto.com
says yes 55 it is.

A couple notes:
1) DO NOT attempt to guess that max pain is ever going to be reliable on something as thin as CAT is this month.
2) Try the "eye method" on CSCO. On immediatly sees 106,000+ calls at 17 1/2. WOW!!! Insane optimism there. A further glance shows more calls than puts at every strike above that. Immediately one concludes a very usefull piece of information. CSCO is not going to close above 17 1/2 barring some miracle. Miracles can and do happen so do not bet your life on this stuff but it is very very likely that the 106K to 30K is going to block any rally on CSCO. 106K calls is 10,600,000 shares of interest. No way the crooks will let those be worth anything if they can help it. (like I said, sometimes news happens or other things) so do not bet your life on this. A quick check on IQUATO will show you that pain is indeed at 17 1/2 but the vast difference at that strike says we will close under 17 1/2. The 50K block of puts at 15 also stands out. One can immediately see the range. Try and short as close to or above 17 1/2 as one can OR try to buy as close to 15 or under as one can.
3) The analysis in #2 is why I prefer to look at cboe as opposed to just let IQUATO figure ot out. IQUATO shows bars, cboe.com shows open interest.

Finally, I have pointed this out before but it is worth repeating.
MAX pain workss best in a sideways or slowing trending market.

It will not be accurate in a panic plunge or a panic buy situation.
It will not work if there is huge news of some kind.
QQQ CSCO INTC MSFT are the ones to watch. QQQ and INTC seem to be the most reliable. If you can determine where those are going then one can make a better guess as to other stocks that one might want to cheat on (with say something like 15K open interest).

Finally, and I have harped on this before many times as well, there is often a reversal on WED of expiry week. Max pain sometimes hits on WED then drifts away. MY RULE (but not the official definition) says that if max pain is achieved on WED thru Fri of expiry week, it is a "WIN" for max pain. The reason for WED is that there is so little time premium left that it is easy for the crooks to hedge their bets and start taking the stock the other direction (away from pain or right thru it in the same direction without stopping).

The best way to play this is to try and get in near a "block" point.
We had a chance with CSCO above 17 1/2 a few days ago but I was not paying attention.

M
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