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142 Weeks And Counting


No Thought Involved 1.1                                                                                            Why Thought Needed 1.2

142 weeks Max Pain                 


                                              My Way 1.3                                                                                                                                                      Friday Close vs. Monday Close

My Way Aapl Pain 142                 


The original Max Pain theory states an exact strike a stock must hit in order to give the most pain to option buyers, this is done through a dollar figure. The opposite is true, a stock will close where option writers have to pay out the least.


This theory unto itself is not all that accurate if we are stating an exact strike, things come up day to day. This is where I come in. I am using basic principles of max pain but adapting it for real world trading. Thus we must shift our thinking to be high probability versus an exact strike low probability trade. If you look at a typical max pain calculator, I am using the outside edges of this theory, as the probability is upwards of 80%.


I use open interest (OI) to interpret a max pain range rather than 1 strike. I also use OI as a guide to where selling or buying pressure will come from along with buy and sell points. I call this theory “open interest max pain”. I believe OI/max pain can be applied to trading whereas original dollar value max pain is a good study for academia.


Image 1.1 -- A running tab of historical data for AAPL’s expiry and whether it expired between the highest OI of puts and calls. (Note, we will always exclude events or known volume days as it is impossible to gauge the outcome.) As you can see the probability is in the 75%+ range if you only had a computer model with zero human input.


Image 1.2 -- is where we come in. This is an example of a “Red” day from image 1.1. It's a screen shot of the market close on 09/17/10. Notice the put side OI. Do you see how far the put OI is OTM and how there are more puts than calls? When an OI chart starts looking like this the stock will tend to “move away” from the puts and give course for an uptrend to start. In a perfect world $270 would have been the magic number for expiry as that was the mid point for the most puts and calls to expire worthless. This is why I do not use an exact strike as you never know option writers true cost basis or position/hedge. So they (commercial money) expired AAPL below $280 to keep at least some of the calls at $0.00. This example shows puts were the #1 goal or position to protect. Run AAPL as high as it can go, notice the puts dropped off a cliff at $270, so that goal didn't have much of a profit incentive after $270 -- hence $275 close.


Image 1.3 -- is my way. I am able to decipher the OI and it's meaning. I am stating my way as going OTM by at least 1 strike from the highest OI to ensure safety from unknowns or taking note of an OI skew leading to a breakout - breakdown. An example of this would be the 09/17/10 cell which I marked in red (image 1.2) I would have never made a risk trade on the call side due to the skew. A more recent example would be 12/02/11. Using image 1.1 it is red, using "my way 1.3" it is green. I recognized the signs of an options breakout and marked the call side in red all week. You would have only made risk trades on the put side -- the safe side. Using my thought process has historically produced 99% accuracy. To reiterate -- "my way" is either going out an additional strike(s) from the highest OI or taking note of an options sentiment change.


How did I use the data from 1.2? When you see something like that you’re going to want to hold on to your long position and if you are an option seller, stick to the put side. If you are a simple buy-write investor and sell calls against your long to create your own dividend, you would have wanted to sell your calls up at the $290 or $280 level. There are times when AAPL will be stuck in a range and you can sell closer to the money on both puts and calls .We also have rare, yet more important times to be caught when we get a skew, as seen in 1.2. This brings to attention a possible move in the stock and we need to stay on the side with less risk.


$5 strikes came into play on 01/28/11 expiry. This shows how accurate this method is as $5 is very tight. If you want to keep those higher odds you want to go out 2 strikes to total $10.

Note: I am a more conservative investor and hold long AAPL position at all times. I am of the fundamental type and see AAPL grossly undervalued as ever. I keep it simple by selling covered calls to create a dividend. I will then use a spec account to trade options around OI/max pain.


Here’s To The Crazy Ones...

  • Dan P

    hey travis,
    love the data. my question is for the first columns (highest OI calls and puts): at what time are you taking that data point? Is that on the beginning of the week, and then you are comparing it to the final price at friday’s close?


    • They are at the end of the week. Back before there were weeklies when I stared, the OI didn’t move all that much because it had a long time to build. With weeklies it’s a different story as they come and go so fast. A good amount of the time you can forecast what it will end up being. Other times it’s tough because the OI starts so low and all are even.

  • RMICK2010

    Wonderful information Travis. I am going to put this info to work next week and will surely donate to your site if I make money! Thanks again.

  • Noah

    This is such an excellent resource, Travis. from one AAPL trader to another: Thank you, brother.