ajtj99's Market Pulse

[Math Junkie]

It's not just iqAuto we're talking about, because they are using the same methodology as the trademarked Max Pain site of BCA Software.

http://www.ez-pnf.com/cgi-bin/maxpain.cgi

The reason I say that is that the BCA site is where I went for the explanation of the methodology, and when I applied it to one of the price points on the iqAuto site, I came up with exactly the value that iqAuto displayed on their chart for that price point. (IqAuto has a page where you can access their raw source data which makes it possible to do this.)

"In other words, the iqauto system counts QQQQ May 52 puts even though it is quite unlikely the index will trade at that range between here and May expiration."

I thought you were concerned about far out-of-the-money options. If you want to talk about deep in-the-money ones, then the fact that the index is unlikely to trade at that strike does not mean that they don't affect the option writers' bottom line. On the contrary, they have an immediate effect on their unrealized gains or losses every time the market moves by even a penny. Here's why:

The current financial liability to writers of in-the-money options at each strike price is determined by taking the difference between the strike price and the current market price of the underlying security, multiplying by the number of options outstanding at that strike, and multiplying by 100 (since each option is for 100 shares of the underlying security). The implication of this is that every time the market price changes by one dollar, the financial liability to the writer of that option changes by $100 times the number of options written at that strike. Thus, the far in-the-money options have a very real effect on the bottom line for options writers as the market price moves, creating an incentive for them to try to do something about it.

If you find that you get better results in your market prognostications by eyeballing the raw number of options near the crossover point, I'm certainly not going to challenge that. All I'm saying is that it is an empirical observation, and is not explained by the use of deep in-the-money options in the Max Pain calculations.