Max Pain sidebar

[mongo]

@lafrisbee @Artful Dodger

I copied the OI table from Stock Option Max Pain into Google Sheets
Then for calls I added a column of the running sum of options less than the current strike (previous sum plus the OI of the next lowest strike). Added another column that is a running total of exposure. This is the previous total + the OI_sum * (difference from current strike to previous (next lowest)).
Copy fill for all strikes.

For Puts I did the same thing but from the high end downward.

Finally, I added a column adding the call and put dollar amounts.

I also compared results to Table 2 from the web page, they all matched.

 

[mongo]

As you allude to, the main problem with max pain is that market makers DO hedge their positions and anything deep-in-the-money on either side is very likely to be mostly if not fully hedged. They are more likely to take on risk in the vicinity of current prices because small moves are far more realistically achievable. It's one reason something like a delta-payout analysis within a weighted window of the current price may be a better predictor than looking for the global peak.

Yeah, I thought about that earlier today and ran a quick +/- $200 filter on the data. Shifted things $5-$10, but to do it right I think requires a better range creation, like % of total OI or something. Otherwise, max pain will just shift to whichever side has more positional load left (as it should).

 

[hacer]

Yeah, I thought about that earlier today and ran a quick +/- $200 filter on the data. Shifted things $5-$10, but to do it right I think requires a better range creation, like % of total OI or something. Otherwise, max pain will just shift to whichever side has more positional load left (as it should).

I would call $200 extremely deep when there are only a few days left. I would start a steep rolloff at 3% ($22.50 for today's action). I have to believe that hardly any options over $20 in the money with just days left are unhedged. The filter should not be symmetric - you don't need to filter out OOTM options - they're more likely to have had the hedges taken off.