In 52 weeks, Apple shares closed within $1 of the so-called Max Pain range 39 times
To ordinary investors, the trading in Apple (AAPL) shares last week must have looked a little crazy. On Monday, when the Dow was up, the stock fell, only to shoot up $9.98 (3.17%) the next day. On Thursday, when the Dow was down, the stock was up $8.62 (2.67%). If Apple could have held on to those gains, it would have registered a rare $15.91 bump from Monday's close. But on Friday, in a pattern that Apple investors find depressingly familiar, the shares fell again and closed at $326.35 -- just about where they ended up the previous week.
To AAPLPain's Travis Lewis, who has been following the trade in Apple weekly options since they began exactly one year ago, it all made perfect sense. Apple almost had to close somewhere between $320 and $330 -- the so-called Max Pain range -- because there was too much money at stake to have it end the week anywhere else.
According to the theory of Max Pain, a stock in which options are traded will tend to close on the day the options expire, absent a major news event, at the point that causes the most pain to people buying options and the maximum profit to those selling them.
It certainly seems to be true for Apple, whose options last week (as they are most weeks) were the most heavily traded of any U.S. stock. In 52 weeks, Apple has closed within $1 of Max Pain 39 times. If you exclude the five weeks in which Apple trading was driven by a major news event -- like an earnings release or a new product introduction -- the Friday close missed Max Pain only eight times in the first year of weekly options trading.
Using Friday's close as an example, here's how it works:
If you're looking for evidence of manipulation, Friday's close was picture-perfect
"The easiest way to think of options," wrote The Market Skeptics's Eric deCarbonnel in a prescient 2009 post, "is as a type of insurance. Investors pay a premium to protect themselves against sharp swings in the market. If these sharp swings don't happen, those selling options (option market makers) keep the premiums as profit."
"In a legitimate free market," he continues, "every MOREPhilip Elmer-DeWitt - May 15, 2011 9:32 AM ET
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