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CM Strategy

Optionalysis: Reliability of Max Pain on the Day Before Expiry

Optionalysis: Reliability of Max Pain on the Day Before Expiry

A quick look at all stocks and Max Pain values (calculated by Options Open Interest) as of yesterday shows why Option Pain might not be all that reliable.

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Let’s take what the Max Pain was on the day before expiry (27 August) and then, what each stock expired at on the 28th (F&O expiry is the closing price of the stock or index). We have only considered stocks and indexes where the total pain was greater than Rs. 1 crore (100 lakh).

The last column shows how far away the stock closed from the supposed point of max pain. While some stocks went close to the Max Pain area, it tells you how many are way off the mark!

Optionalysis: Reliability of Max Pain on the Day Before Expiry

The number of stocks that remain within a 1% or even 3% range of the Max Pain point is also abysmally low (considering only the 1 cr.+ Pain stocks, the others are illiquid in options)

Optionalysis: Reliability of Max Pain on the Day Before Expiry

The point is:

• Max pain isn’t very reliable for stocks. Avoid writing calls or puts just because the stock is too far from the strike price, just based on Option Pain.

• Indexes seem more reliable but the back test needs to have far more data points than just one. (Also they have far more volume)

• Look at JP Associates, RCOM and DLF in the graph. They moved so far away that any option writing would have killed their portfolio.

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

Optionalysis: Reliability of Max Pain on the Day Before Expiry

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