No Such Thing As MaxPain Huh? Fine, Let’s Call It SassyPain

I’ve seen some stuff floating around twitter lately that maxpain doesn’t work. Well, I would agree if you use traditional maxpain, which uses dollar value as opposed to open interest and volume. You can read more about that here.

After a couple years of tracking open interest on high beta stocks and watching stocks pin I started to get a feel for which ones do and under what circumstances. Here are things I ask myself to help me determine the likelihood of a pin and if I can try to get into a good trade based on the information.

• Is the market having a strong up or down trend day? Note: There is much less chance of pinning on a strong trend down day versus up day (meaning puts don’t hold the stock up as well as calls hold it back).
• Has price been able to hold over high calls for several hours/days with strong positive breadth?
• Has price been holding under high puts for several hours/days with strong negative breadth?
• How much volume sits at each open interest strike?
• How much volume is trading at those strikes on Friday?
• How does that stock typically trade based on its open interest?
• Is it a monthly or a weekly option?
• Is there news, earnings etc?
• How has that stock moved throughout the week and how has the open interest changed thoughout the week?

Is this a lot of information to have to know? Yes, it is. However, after a couple years of doing it, I am quicker to gauge the reality of the situation at hand. Does it always work? Absolutely not. For that reason I don’t tend to trade much based off of open interest at the start of the week, but more-so on Thursday or Friday when I can trade with very limited risk by using cheap options that have little premium left.

Today (4/17/14) I focused on TWTR. Look at the open interest chart. The odds of a 45 strike pin were very high so when TWTR was up in the morning I bought $45.50 puts for $0.10. I was able to sell them 30 min to an hour later for $0.90. That’s an 800% return. TWTR closed today at $45.03.

Here are some other stocks you can look at to see how pinning would have worked on today’s expiraton. Take a look at AAPL. Everyone got very excited that it got above 525 today. It got as high as 527.75. Well you could have bought cheap puts or sold calls at that point because with all those calls at the 525 strike, the odds were AAPL would be pushed her back down. AAPL closed today at 524.99.

Another reason I like to look at open interest is it helps keep me out of trouble. Sometimes just knowing where the stock probably WON’T go is valuable information by itself. FB got over 60 a few times this week and that is a technical breakout zone, but if you knew the open interest then you knew the risk/reward wasn’t that great to go long. In essence it can prevent you from taking trades that may have a good technical set-up, but get trumped by the open call or put positions. You could also use the information to sell credit or put spreads. FB closed today at 58.93.

How about TSLA? Doesn’t somewhere around 200 make sense to you based on this graph? TSLA closed today at 198.03.

Let’s do one more. How about BIDU? Lot’s of ints-week stock movement and yet all week the open interest pretty much stayed the same.  Based on the graph 155 made  the most sense to me and despite getting as high as $159.50 and as low as $147.25 this week, BIDU closed out at $155.80.

Ok, ok, just one more. Let’s look at GS which even had earnings today and beat expectations gapping higher and making a high of $161.44 today. After looking at the graph below, doesn’t it seem fitting that it closed at $157.44? Hence, does traditional maxpain work? I would say not very well, but if you use a non-traditional way combined with the things I mentioned above you can make some decent money in a short period of time. Or maybe it’s all just a coincidence.

Consider subscribing to learn more about how I use my own tailored SassyPain ;-).

If you liked this post, you may find this  helpful as well.