MORE MISH ON MAX PAIN
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To:tippet who wrote (179560)
From: mishedlo Friday, Jul 12, 2002 11:50 PM
View Replies (1) / Respond to of 179572
In what way?
Up down or around?
MY definition of Max Pain is if it hits ANY time during expiry week.
I do not care what the classic definition is.
We have had serious reversals 3 times during expiry week (twice lower once higher) after pain was reached. WED is normally the day for reversals but one of them was on a Tuesday.
Yes MAX Pain says expiry close, but I say ANY HIT during expiry week counts. By that looser definition Max Pain has worked. If you do not like that definition and adhere to expiry close as the basis for success, max pain has sucked several times. Perhaps you think that is not a fair definition but the point is to not be a greedy pig. Max pain hits, it may reverse or keep going. If you make a play based on pain and your target hits during expiry week take the profit and run (particularly if a rally was involved).
So while you may think I will be surprised (actually not much will shock me, from delta hedging long or short on some BS news) to my favored scenario of reduced volatility and more or less sideways action, to a complete and utter collapse like last month.
My point was that once again, out of the blue the MFs rallied CSCO from the depths of hell to max pain (but by my definition 1 day early). I do not know if it hits next week or not but I bet it comes close. My take is that 85% of the put premium if not more was sucked out of CSCO on that BS rallly today to near 15, and that they easily could have shorted enough shares near 15 to 100% cover any plunge that CSCO might take next week. A day early by my definition and perhaps the same on QQQ but sometimes you have to be a little flexible in declaring a victory for "da boys". There is no question they cleaned up this month. Look at all the calls that were totally toasted, and with todays rally they sucked all the premium out of the PUTs as well. Can they close it here? Who knows. Close enough by my standards (if you give me a day).
M
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To:KeepItSimple who wrote (179569)
From: mishedlo Saturday, Jul 13, 2002 12:37 AM
Respond to of 179572
KISS in theory they can hedge any time (some people insist "the powers that be" are always delta neutral).
Personally I doubt they are neutral. If they were we would not see these sudeden explosive rallies out of nowhere typically within 7-10 days of expiry.
If they are not properly hedged we see the mysterious upgrade or downdrade or just plain out of the blue rally.
The reason why it is important to WAIT is that max pain can and does change during the month. Sometimes quite dramatically. Last month Max pain (one month out was 37! but dropped like a rock as bears learning their lessons cashed out puts and bulls kept piling on with calls).
The way to play it is, 7-10 days out, the further the the distance from pain the earlier the rally will likely start (March bein the perfect example - look at that rally please). But, wait for the confirmation. Once the explosion starts, pile on and assume max pain is gonna hit. Bail if it looks like you are wrong.
Note: all this is in hindsight (and most of these I played small cause I am an idiot), but loading up when extremely undersold, 7-10 days in front of expiry at the first real sign of a rally has been a huge winner all year. If the damn thing overshoots, buy puts and assume a pullback (March overshot by a full 2 QQQ points, whereupon we declined without ever looking back).
Max Pain provided no signifiucant rallies the past 2 months (I am counting this one but I could in theory be wrong) cause clowns kept loading up on calls in anticipation. I did a post on the Turnip board on this and suggested this rally was DOA cause of all the call buying. Huge call buying into a decline causes max pain to drop.
That is why you wait. The further from pain we are, the deeper in puts the option chain looks, the further away (but no sooner than about 10 days) the rally is likley to start. Look for a BS catalyst such as CSCO reporting, AMAT reporting etc and judge how overbought or oversold we are at the time and act accordingly.
It has taken me a long long time to figure this shit out.
The Key is a "Max Pain Hit" during the week, take the damn profit and run.
This month we had a nice 4th of july rally but people kept piling on with calls on the fisrt pullback, lowering max pain from 27 to 25 and killing the rally. Watch CBOE for buildup of puts and calls at nearby strikes for a clue as to whether it contines or stalls.
Does this make any sense?
M
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