DaytradeTeam Profitzzz

Understanding "Max Pain" can be a valuable supplement to your trade analysis during options expiration week, especially on Thursday and Friday -- our Swing Trading Systems use this strategy quite often:

Max Pain is a term used to describe the specific price that a stock can close at on options expiration day in order to lead to the most dollars lost for those who bought options on that stock over the past months. "Everyone loses=Max Pain". Not coincidentally, this price point also leads to the most profit for those who SOLD the options over the last months (usually institutions, market makers, etc.)

Example: Take a look at the options chain on MSFT, found here: MSFT Options Chain

Notice that for both calls and puts, the Open Interest (# of contracts sold) is highest at a specific strike price. This means that the Max Pain point is that strike price, because if MSFT closes at or extremely near that price on the day these options expire (always the 3rd Friday of the month), then all of those call AND put options will expire completely worthless--PURE PROFIT for those who have been selling them this entire time. Max Pain followers believe that as you get closer to that Friday expiration, the stock will tend to be pulled closer and closer to the max pain level.

Stocks tend to move toward these max pain points for two reasons--#1 there is a lot more profit to be made for the sellers (who are also big players in determining the buying and selling of the stock) of those options if MSFT closes at the max pain level on Friday than if it does not. It does not even matter if it moves $2.25 up or down on Monday--once the options expire Friday the profit is in. #2 there is a natural pull toward the strike price with the most options open because of the execution of the in-the-money options as we get closer to the expiration date---i.e holders of call options executing them and then selling the stock right away.

So, is this a guaranteed strategy? No way--like we have said before this should only be used as a supplement to your current trade analysis. It is by no means a crystal ball into the near-term future of the stock.

Here are a few simple tips for incorporating Max Pain into your strategy:

Max Pain indications only work on extremely high volume stocks with high levels of options trading

Max Pain indications only work very near the expiration date of the option, usually 2-3 days--the closer the stock to the max pain point and the closer we are to the closing Friday bell on expiration day the more accurate it becomes.

Only use Max Pain IN ADDITION to your other DaytradeTeam trading signals. If the support/resistance evaluation or the trend lines do not lead you to the same position as max pain, look for another opportunity.