Apple’s maximum pain

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Apple’s maximum pain

We make a few assumptions:

  1. Options are written more by market makers,
  2. Market makers carry inventory and rebalance,
  3. Rebalancing of options are related to the underlying asset’s trade.

As options’ expiration nears, there is an optimal (underlying asset) price point for which option payout to option holders is minimum. This optimal point it referred to as maximum pain.

As underlying asset price increases, call options’ payout increases. As it decreases, put options’ payout increases. Thus, maximum point is the optimal (minimum) payout.


Sample outcome:
Screen Shot 2013-06-19 at 12.02.22 AM

Maximum pain is 455. If this theory is correct, we should see 455 by June 22, 2013. We should at least see a price increase from todays 431.77 level towards 455.

maximum_pain



Data
January 8, 2014 at 12:21AM CST: 140107_AAPL_max_pain
January 8, 2014 at 4:02PM CST: 140108_AAPL_max_pain
January 13, 2014 at 8:27PM CST: 140113_AAPL_max_pain
January 15, 2014 at 6:48AM CST: 140115_AAPL_max_pain
January 15, 2014 at 10:44AM CST: 140115b_AAPL_max_pain
January 15, 2014 at 4:52PM CST: 140115c_AAPL_max_pain
January 15, 2014 at 11:16PM CST: 140115d_AAPL_max_pain
January 16, 2014 at 8:22PM CST: 140116_AAPL_max_pain