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Optionalysis: Expiry and Max Pain


Optionalysis: Expiry and Max Pain

This is an archive post for Capital Mind Premium Subscribers, sent on 27 May 2014. Click here to Subscribe.

A quick post on Options today. Max Pain (as we’ve explained earlier) seems to be at 7300. This can obviously change rapidly but this is where we are at around 1 pm. Today is expiry day so the max pain analysis is only till 3:30 pm.


Optionalysis: Expiry and Max Pain

We’ve traded very little on options in the last month, even though it’s been a volatile month, preferring to work the cash markets instead.

The market trades at 7277, a 23 point discount to the Max Pain value. There is a tremendous amount of money in the options market so I expect players to act fast when markets moves adversely to their positions, and option writers tend to have more cash at their disposal.

But look carefully at Infy. The stock fell big time today, and is trading below Rs. 3000. The Max Pain for Infy today is at Rs. 3200!

Optionalysis: Expiry and Max Pain

The Infy 3000 call is trading at Rs. 2 now, and is a potentially low risk entry for a couple hours, hoping . But there’s a major chance of a 100% loss, so we should keep the position size small! (Plus this was news driven, based on a top management resignation yesterday. So we have to factor that in as well)

We would however be circumspect on Max Pain as a strategy itself since it has been a poor indicator of stock movement in the past. Having said that, there are always risk-reward equations that are skewed enough to incite a trade; we might lose most of such trades, but the gain on a few will outstrip these losses.

Note that the Infy stock has to go up by Rs. 4 above the strike price in order to make it worthwhile. (Due to STT taxes).

For the record, this trade failed.

Optionalysis: Expiry and Max Pain


Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.




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