As a former CBOE stock options market maker (floor trader, not day trader) and someone who trained others to be professional options MM, my friend is a bit befuddled by the fascination with max pain.
While it is interesting to see where people have placed and are keeping their trades (open interest [OI]), most folks seem to think max pain is some kind of grand conspiracy between the market makers in the stock and/or stock options. Could you share more about that?
Yes, if stock blows through big OI strikes within a week or two of expiration, it will cause the person short the option to have to negatively scalp their position (which they were compensated for by collecting the option premium)... and yes also the person long the option will have to positively scalp their position (which they paid for by paying the option premium).
These things offset. Options is largely a zero sum game. Market makers largely stay "delta neutral." They trade the stock against their options positions to minimize stock direction risk.
Long call speculators cause market makers to buy stock against the calls they sell.
Covered call writers cause market makers to sell/short stock against the calls they buy. (this is why calls get crazy cheap on hard to borrow securities, because MM cannot short stock against calls they buy)
Long put speculators cause MM to sell stock against the puts they short. (this is why puts get crazy expensive on hard to borrow securities, because MM cannot or have to pay crazy interest to short the stock)
Cash covered put writers cause MM to buy stock against the puts they buy.
If market makers can also "delta lean" into positions. If their major short gamma position is higher on the stock they might "lean toward" that strike in case the stock blows through that strike, or they can religiously stay delta neutral. If their vega is negative, they may lean short because "stocks go up on an escalator, and down on an elevator", or down movements tend to cause volatility to go up (in normal stocks, in normal situations). So if stock goes down and vega goes up, your short delta position benefits from stock going down and short vega is hurt by IV increasing... If stock goes up, helped by vega going down, hurt by short deltas. There's no grand conspiracy by regular options MM.
Yes, we are in the era of the hunter killer stock algos that test the patience of the weak handed & weak willed. To the extent that Citadel and other hedge fund options MM control the market, they can launch their attacks to test or break options positions if they are on the other side, but it gets way harder with bigger, more heavily traded stocks. They generally cannot pull this crap with Tesla since it has been very heavily traded since December 2019. We are also in a bubble of day trading predatory market manipulation gangs (mostly preying on small float and HtB stocks).
Don't fool yourselves and stay safe out there.
While it is interesting to see where people have placed and are keeping their trades (open interest [OI]), most folks seem to think max pain is some kind of grand conspiracy between the market makers in the stock and/or stock options. Could you share more about that?
Yes, if stock blows through big OI strikes within a week or two of expiration, it will cause the person short the option to have to negatively scalp their position (which they were compensated for by collecting the option premium)... and yes also the person long the option will have to positively scalp their position (which they paid for by paying the option premium).
These things offset. Options is largely a zero sum game. Market makers largely stay "delta neutral." They trade the stock against their options positions to minimize stock direction risk.
Long call speculators cause market makers to buy stock against the calls they sell.
Covered call writers cause market makers to sell/short stock against the calls they buy. (this is why calls get crazy cheap on hard to borrow securities, because MM cannot short stock against calls they buy)
Long put speculators cause MM to sell stock against the puts they short. (this is why puts get crazy expensive on hard to borrow securities, because MM cannot or have to pay crazy interest to short the stock)
Cash covered put writers cause MM to buy stock against the puts they buy.
If market makers can also "delta lean" into positions. If their major short gamma position is higher on the stock they might "lean toward" that strike in case the stock blows through that strike, or they can religiously stay delta neutral. If their vega is negative, they may lean short because "stocks go up on an escalator, and down on an elevator", or down movements tend to cause volatility to go up (in normal stocks, in normal situations). So if stock goes down and vega goes up, your short delta position benefits from stock going down and short vega is hurt by IV increasing... If stock goes up, helped by vega going down, hurt by short deltas. There's no grand conspiracy by regular options MM.
Yes, we are in the era of the hunter killer stock algos that test the patience of the weak handed & weak willed. To the extent that Citadel and other hedge fund options MM control the market, they can launch their attacks to test or break options positions if they are on the other side, but it gets way harder with bigger, more heavily traded stocks. They generally cannot pull this crap with Tesla since it has been very heavily traded since December 2019. We are also in a bubble of day trading predatory market manipulation gangs (mostly preying on small float and HtB stocks).
Don't fool yourselves and stay safe out there.
