There's something very fishy about the weekly options market. Is it time to reel in the bad guys?
It was 3:48 p.m. on Friday April 29 and traders who had purchased Apple (AAPL) April 29 $350 "calls" -- options that gave them the right to buy Apple shares in blocks of 100 for $350 per share -- were sitting pretty. The stock was trading around $353.50 and those calls were worth more $350 apiece (the difference between the price of the stock and the so-called "strike price" of the option times 100).
Then, in an extraordinary burst of trading -- exacerbated by the rebalancing of the NASDAQ-100 scheduled for the following Monday -- more than 15 million shares changed hands and the stock dropped below the $350 strike price just before the closing bell. Result: The value of those calls disappeared like a puff of smoke.
For people who follow Apple -- investors and speculators alike -- it was sickeningly familiar turn of events, one that has its own language and terms of art. The tendency for an underlying stock to close at or near an option's strike price at expiration is called "pinning." And the point at which a stock will close to the greatest detriment to anyone holding options at expiration is called max pain. There are websites, like optionpain.com, that will chart, free of charge, the max pain point for any stock for which options are traded.
Conventional wisdom has it that Apple's shares have been pinned to the max pain point nearly every Friday since weekly options trading began. Based on the stock's closing prices over the past two months, it certainly seems that way.
In the graph below, we've charted eight weeks of daily closing prices indicating how much higher or lower they were than the strike price of the calls nearest to that Friday's close (marked in red).
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