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Sometimes, But Not This Time
Author: James Brumley (info)
Website: http://bluegrassportfolio.com
Posted: July 17th, 2007 at 3:03 pm EST
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It wouldn’t be expiration week if we didn’t look at it, so here it is again - the open interest chart, and the options expiration ‘max pain’ theory.
Basically, the idea is that upon option expiration, the maximum pain that investors can experience will indeed be the amount of pain experienced. In other words, however the market can close so that most options expire worthless, it will. So, by looking at where the majority of the open interest lies slightly before an expiration, you may be able to get a good feel for where things will end up by the time expiration gets here.
Below, you’ll the open interest chart on the NASDAQ 100 Trust (QQQQ) as of mid-day Tuesday. Needless to say, the majority of the open interest on the calls is at the $49.00 strike. Most of the open interest on the put side of the table is at the $47.00 strike. According to the theory, the QQQQ’s should close somewhere between there by Friday….around $48.00.
Now normally I’d be inclined to trade the theory, Today, however, we wanted to illustrate a case where an index is so far out of that range, the theory may not apply. Currently trading above $50.00, I have a hard time believing we’re going to see the QQQQ’s lose 4% over the next three days. Stranger things have happened (I never say never), but that’s not a bet I’m personally willing to make.
QQQQ July Option Open Interest
So, we’re chalking it up to the exception that proves the rule. We’ll still follow this indicator in the future, but I’m not relying on it for July.
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James Brumley, Stock Market, Trading
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