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eBay Inc. Message Board

  • cwbag11 cwbag11 Sep 15, 2004 5:08 PM Flag

    Call me stupid but what does Max Pain

    Call me stupid, but what does max pain 85 mean? I keep seeing it here on the board and figure it has something to do with options, but not sure.

    Thanks

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    • A generic definition would be the stock price that would put cause the least amount of in-the-money value for all open interest, both puts and calls, for a given expiration period.

      In the case of the table below, the value of all of the September open interest based on a particular Friday close goes down until $84 is reached in then goes back up. Thus $85 would be the "Max Pain" point.

      Value of All September Open Interest (in millions)
      92 $468
      91 $425
      90 $381
      89 $368
      88 $354
      87 $340
      86 $327
      85 $313
      84 $329

      Theoretically this concept makes a lot of practical sense but is often times proved wrong.

      That being said, I do believe stock is overbought and with Max Pain $8 below current stock price there might be some room for a gap downward. IMHO.

      • 1 Reply to johnlstuart
      • The current price is around 94 (and not 92) so at the current price the value of all September Open Interest (using your numbers)would be over $550 million, that is $240 million more than the max pain. That is a huge difference.

        A Friday close at current or higher price would result in a huge payout to option holders, majority of them are the call holders. Most of the puts are expiring worthless.

        Also with max pain at 84-85, that puts the Max Pain $9-10 below current stock price. I do not know how ebay reacts to max pain, but a $9-10 difference is big.

 
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