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  • sherlockshah sherlockshah Feb 1, 2013 4:05 PM Flag

    please respond to the fellow that called the 265 close! its amazing how you guys know this stuff

    I need some help, I always admire the ones that call the option day close and figure out the price.

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    • You can gauge the so-called Max Pain theory by finding the strike price of the nearest expiry month that has the most added open interests on both the calls and puts contracts.

      Currently, Feb 13 (with 14 days left):

      (PUTS open interest + CALLS open interest = total)

      260 strike = 3354 + 1587 = 4941
      265 strike = 3279 + 1894 = 5173
      270 strike = 5808 + 4915 = 10723
      275 strike = 1816 + 4371 = 6187
      280 strike = 1607 + 4250 = 5857

      Open interests are contracts that are sold (or bought depending on your strategy); however, most savvy option traders would want to sell near month contracts due to rapid time decay. Only the amateur option traders will go buy near month contracts and use them as a lottery ticket to hedge their position.

      The fact of option contract is that both call/put buyers will lose everything on their contracts if the closing price lands smack on the strike price. So that is painful to the option buyer.

      As the Max Pain theory goes, most of these contracts are sold by big boys who have deep pockets. Since they are sellers, their main interest is to see your option contracts go to zero. Stock prices, therefore, will tend to be pinned at a strike price that has the most combined call/put open interests because that is where these big boys sold their contracts, and where they can inflict most pain on these amateur option traders.

      AMZN at the moment would likely to be pinned at $270 if these Feb 13 options were to expire today. This number will change and the most accurate one is obviously the one that closes on the expiry day.

      Hope this helps. Good luck!

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