Option Investor
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Jeff Bailey : 3/17/2006 1:33:06 AM

For what it may be worth, recent "Max Pain" theory value for GOOG is $350 ($10 increments).

OEX "Max Pain" theory still 585 tonight (5-point increments)

Some believe "Max Pain" theory is of NOT USE. The reason I've been told is "the index/stock never settled there, so it is of no use."

I disagree STRONGLY with that. "Max Pain" theory is great in that it gives a HARD WORKING TRADER the opportunity to know where a mathematically derived point of equilibrium is being established. The HARD WORK is the focus and repetitive process of tracking Open Interest, and then trying to make a more informed observation of where the "flinch" point is at, when the index, or security you're interested in is found.

You can be almost certain that the move we saw on Tuesday, was the "certainty" that the then "580 max pain" was the easy trade. Heck, Monday evening we knew what to look for on Tuesday and had a trade ready to go.

It was all based on the observation that there was too much money getting on the WRONG SIDE of things going into expiration.

If you think this week has been a wild twist some stocks going up, some going down (even stocks in the same sector, or very similar business), next week could be as wild!

Money is going here, money is going there as this bet that goes wrong is being put off on another bet, in order to hedge the other bet.

Some are certain that the directional move into an expiration will be reversed once expiration has passed. That "certainty" can have a HUGE bet behind it. If that HUGE bet is proven wrong, there can be more pain to come.

Keep your trade size, or capital exposed to a minimum around expirations. There's real good volume in the markets right now, so you know there's a lot of interest and DISAGREEMENT taking place. There will be flinch points that are direction, or reversal in nature.

If we as traders make the BIG BET around expiration, we tend to get emotional and very confused. "Was my analysis wrong? Or is it simply expiration related?"

Jeff Bailey : 3/17/2006 12:49:23 AM

GOOG March Option Montage with Open Interest (OI) as of Wednesday's 03/15/06 Close at this Link ... After I look at WMT's option montage and look at GOOG's option montage, do you beging to see a difference? Especially if trying to pick out a "max pain" strike?

Good gravy! Open Interest is getting so evenly distributed at this point, it becomes a dart throw compared to the WMT option montage and March open interest.

The last two session's I've said "Mar $360 Call holders need a gap above $353"

I mean it. But I have never "counted on it." The REASON I say it, is for GOOG to move in the Call holders direction, we need a "shock" to inflict a panic. It is similar to domino theory. Get one end to suddenly decide to unwind, and it can build on itself. I, you, NEVER know for certain how many calls have been sold NAKED. How many puts have been sold naked. How much stock has been shorted, or leveveraged on the long side where a "shock" or gap juuust above a pain threshold then starts to unwind. Then as a position starts to unwind, it triggers another "pain threshold" and that position unwinds.

Do I "count on" the $360 Calls surging tomorrow, as a trade unwinds in my favor? No. If I did, I'd say "load the boat and keep buying, now at $0.15."

The only reason I even MENTION the "gap higher" is that is, or can be why an expiration offers a surprise and can have such volatility.

We'll see how things go in the morning, but at this point, I'm not willing to add to any GOOG option trades.

Jeff Bailey : 3/17/2006 12:18:21 AM

Op-Ex Game WMT Recap ... What we were looking at for a Op-Ex Game play Link

And what ended up unfolding Link

And what the Option Montage looked like Link . Open Interest Note: I'm just seeing this as I type. See the $45 Call OI of 13,434? See the $45 Put OI of 48,537? If you were the Market Maker of these options, were you going to let WMT go below $45 without a fight? Now look at the $47.50 Call OI. Darn it! Thats almost the exact amount of OI as the $45 Puts. Look at the $47.50 Put OI. Darn it! That's almost the exact amount as the $45 Call OI. What mid-point of $45 to $47.50? Yes! $46.25.

Shoot! OK, these are some notes, this is my trader's log.

These MUST be the characteristics of a good Op-Ex game play.

Jeff Bailey : 3/17/2006 12:00:13 AM

Current OPEN MM Profiles found at this Link

Right idea for a WMT "Option Expiration Game," but just a hair too strong above the $45 strike.

This is a pretty neat strategy isn't it? Yes... if you can get filled on the ONE you want to try and play.

It is best to sprinkle your bets among several if you can get a few together.

The plays that really seem to work is 1) OEX in a bullish trend. Did you notice even on the 10-minute interval charts I showed, it seems an individual stock play that is near a strike, where Call/Put OI is more bullish for some "Max Pain" performs better (even for a pure OEX play) when the OEX is above its 200-pd SMA? 2) It is pretty important to LOOK at, and understand what "Max Pain" is all about. The stocks that trade at, or near a strike, where the next strike is "far above" where the stock is currently trading going into the expiration. For any stock trading $45.00, $2.50 higher gives the stock and at the money option some room to move. 3) When you can lay out the PIVOT LEVELS and look for an "obvious" target, that's even better. I will have to admit that WMTs move today was stronger than I thought it might be. The REASON I thought we should pay just $0.30 instead of "go market at $0.45" like somebody else did this morning with 10 contracts Link is that I was thinking the stock might only get to $45.63 and the overlapping MONTHLY Pivot/WEEKLY R1. If I/we would have bought 4 options at $0.45 and WMT did trade to $45.63 that didn't sound good/favorable to me. I was thinking we'd be able to get 5 or 6 calls at $0.30 then have the upside to at least $45.63.

Jeff Bailey : 3/16/2006 11:23:24 PM

Closing U.S. Market Watch found at this Link

OI Technical Staff : 3/16/2006 9:59:59 PM

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Jeff Bailey : 3/16/2006 9:24:40 PM

Energy Futures April Nat Gas settled up 1.74% at $7.2670.

April Heating Oil settled up 1.73% at $1.8125.

April Unleaded settled up 2.48% at $1.8744.

April Crude Oil settled up 2.27% at $63.58.

Jeff Bailey : 3/16/2006 8:59:59 PM

Closing Internals ... NASDAQ: Traders among the 4 and 5-lettered variety were also very active today with the NASDAQ turning 2.4 billion shares. Computers and mathematical models got a workout to have advancers and decliners evenly matched 1,504/1,509. The very broad NASDAQ Composite Link traded a high of 2,323.79, but finished down 12.28 points at 2,299.56. Of the 3,000+ stocks traded on this electronic exchange 231 traded a new 52-week high, while 40 traded a new 52-week low.

Jeff Bailey : 3/16/2006 8:38:07 PM

Closing Internals ... NYSE: Quarterly expiration volumes build for a second-straight session on the big board as traders and investors make needed adjustments. The NYSE turned an impressive 2.3 billion shares with 2,139 stocks advancing and 1,111 stocks declining. 331 stocks with one, two and three letters in their symbol recorded a new 52-week high, while 23 stocks at the big board traded a new 52-week low. The very broad NYSE Composite Link set yet another record all-time high, yes, an all-time high of 8,281.20 and fished up 25.23 points, or 0.30% at 8,261.92.

Jeff Bailey : 3/16/2006 7:58:09 PM

Screen Capture Software not functioning ... My screen capture software is not functioning at this time, so I'll update current MM profiles in text form now.

Shares of Sunoco (SUN) $81.37 +2.33% Link were up $1.86 and had our SUN Aug $85 Call (SUN-HQ) $6.49 +13.85%.

PetroChina (PTR) $99.93 +0.48% Link finished up $0.48 after trading a session high of $100.09. The PTR April $90 Put (PTR-PR) is currently bid $0.70.

Baidu.com (BIDU) $48.32 -0.37% Link was off $0.18.

Treasuries were higher across the major maturities, but let's not forget, its a quarterly expiration. The benchmark bond had the 10-year yield ($TNX.X) Link falling 8.5 bp to 4.656%. Our rare bond trade for the Market Monitor had the iShares Lehman 7-10 year (AMEX:IEF) $82.52 +0.63% Link up $0.52. I've raised a stop to $81.89 on this security. Bond futures traders should act accordingly.

Shares of Google (GOOG) $338.77 -1.66% Link were down $5.73 and with one day left in March expiration, the GOOG Mar $360 Call (GGD-CL) finishes with a bid of $0.10. It will take a St. Patrick's Day miracle to get this profiled trade into the green from yesterday's $1.60 entry. Unless the stock indicates a gap open higher above $353.00 in the underlying tomorrow morning, I have an OPEN order to sell for $0.40 (depending on your broker's commission schedule, $0.30 also)

The ones you want don't alway come your way, but there's several more expirations this year!

Shares of Wal-Mart (WMT) $46.36 +2.29% Link bounced from the $45 strike, and while I was waiting for a $0.30 entry point in the WMT Mar $45 Calls (WMT-CI) the low of $0.45 for these calls was it. They finish with a bid of $1.30, up a spectacular 285.71%.

If I had bought these calls today (I didn't, I had a bid in at $0.30) I'd dump them faster than you could say boo-ya should the stock break back below its DAILY Pivot. WMT DAILY Pivots for tomorrow are $45.05, $45.71, Piv= $46.07, $46.73, $47.09.

Watch Listed ... Valero Energ (VLO) $58.52 +1.45% gained $0.84 and get the "buy signal" at $58.00.

Murphy Oil (MUR) $47.49 -0.62% Link recovered from a low of $45.37.

Advanced Micro Devices (AMD) $34.05 -2.96% Link was down $1.04.

Jeff Bailey : 3/16/2006 6:13:45 PM

Bullish swing trade raise stop alert for the iShares Lehman 7-10 year (AMEX:IEF) to $81.89. Target remains $83.00 for this security.

Jeff Bailey : 3/16/2006 4:22:20 PM

Swing trade bullish call order alert ... Place an order to sell long the GOOG Mar $360 Call (GGD-CL) for $0.40. This order will remain open unless GOOG were to indicate a gap higher open above $353.00.

Daily Pivot levels for tomorrow ... $330.96, $334.86, Piv= $341.81, $345.71, $352.66.

Jeff Bailey : 3/16/2006 4:05:08 PM

Buy Program Premium ... DIA $112.75, SPY $131.03

Jeff Bailey : 3/16/2006 3:46:55 PM

PetroChina (PTR) $99.45 +0.60% ... traded as high as, as $100.09.

Jeff Bailey : 3/16/2006 3:37:52 PM

GOOG Mar $360 Call (GGD-CL) update alert currently bid/ask $0.15 x $0.20 with GOOG $338.51 -1.74% (INX.X 224.75 -0.05%)

Place Day Limit Order to close the call at $0.45.

Jeff Bailey : 3/16/2006 3:32:15 PM

Ashworth (ASHW) $9.80 +11.36% ... surging

Jeff Bailey : 3/16/2006 3:26:53 PM

03:00 Internals found at this Link

Jeff Bailey : 3/16/2006 3:12:24 PM

03:00 Market Watch found at this Link

Jeff Bailey : 3/16/2006 2:45:51 PM

Google (GOOG) alert $342.30 -0.63% ... I see NOTHING in the Option Montage that gives bullish thoughts.

At 03:30 PM EST (02:30 Chicago) GOOG is not above $356 I will be looking to sell long the GOOG March $360 Calls (GGD-CL)

Jeff Bailey : 3/16/2006 2:28:43 PM

ICE $66.54 ... If short on Op-Ex analysis/observations, would look to cover here on undercut of MONTHLY R2.

Jeff Bailey : 3/16/2006 1:40:33 PM

Treasury to sell $37.0 Billion in T-Bills on Monday ... DJ - The Treasury plans to raise about $4.6 billion in fresh cash Monday with the sale of about $37.0 billion in short-term bills to redeem $32.4 billion in maturing bills.

The weekly announcement was delayed from its normal time at 11:00 a.m. EST, as debt managers awaited a Senate vote approving an increase in the public debt ceiling.

The sale amount is down from $40.0 billion sold at the previous weekly three- and six-month T-bill auction.

The offering will include $20.0 billion of 13-week bills, and $17.0 billion of 26-week bills, which will be dated March 23 and will mature June 22 and Sept. 21, 2006, respectively.

The Federal Reserve holds $16.01 billion of maturing bills for its own account. It will likely roll over its holdings into new bills at either Monday's three- and six-month bill auction or Tuesday's four-week bill auction.

Noncompetitive tenders for the bills, available in minimum denominations of $1,000, must be received by noon EST on Monday. Competitive tenders for the bills, available in minimum denominations of $1,000, must be received by 1:00 p.m. EST on Monday.

Jeff Bailey : 3/16/2006 1:26:42 PM

01:00 Internals found at this Link

Jeff Bailey : 3/16/2006 1:10:42 PM

01:00 Market Watch found at this Link

Jeff Bailey : 3/16/2006 1:02:00 PM

Sunoco (SUN) alert $80.43 +1.43% Link ... I was hammered with various alerts this morning. Break above $80 strike and 3,055 $80 Call OI. Saving positions?

Jeff Bailey : 3/16/2006 12:55:57 PM

ICE $68.47 -1.16% ... expiration or no expiration?

Jeff Bailey : 3/16/2006 12:53:35 PM

Marathon Oil (MRO) $77.01 +3.06% Link ... Expiration or no expiration, this one looks bullish as all getout.

Jeff Bailey : 3/16/2006 12:52:14 PM

PetroChina (PTR) $99.58 +0.73% Link ...

Jeff Bailey : 3/16/2006 12:49:08 PM

Murphy Oil (MUR) $47.26 -1.10% Link ... Most active options at this Link

The Jan07 $45 Put action at $4.00 is interesting. If insurance against a long, then $45.00 - $4.00 = $41.00.

That might "make sense" as a trade at $41.00 would be break of major support.

Further testing would be to watch OI changes. If OI declines, then today's 400 could be a "sell to close" where indeed all the bad news is factored in.

Tab Gilles : 3/16/2006 12:37:41 PM

Murphy Oil (MUR) 5 minute chart Link

Daily Link

weekly Link

Tab Gilles : 3/16/2006 12:31:07 PM

Murphy Oil $47.30 - 0.45 from yesterday's close. OBYAI Bid $7.10/Ask $7.30

Jeff Bailey : 3/16/2006 12:04:29 PM

Philadelphia Fed ... March Business Index 12.3 Vs Feb 15.4

March Price Paid 17.2 Vs Feb 30.5

March Price Received 15.4 Vs Feb 18.2

March New Orders 20.8 Vs Feb 12.5

Price Pressures Show 'Moderating Trend'

Jeff Bailey : 3/16/2006 11:39:35 AM

Wal-Mart (WMT) $45.97 +1.43% ... Gets the trade at WEEKLY R2!

I do see an AP story from last night at this Link

Jeff Bailey : 3/16/2006 11:27:43 AM

11:00 Internals found at this Link

Jeff Bailey : 3/16/2006 11:07:01 AM

11:00 Market Watch found at this Link

Jeff Bailey : 3/16/2006 11:03:41 AM

Google (GOOG) $346.40 +0.55% ... looks like you're going to have to be my "Expiration Manipulation Game" trade. Get a move on you bugger!

Jeff Bailey : 3/16/2006 11:02:08 AM

Wal-Mart (WMT) $45.72 +0.86% ... DAILY R2. Ugh!

Jeff Bailey : 3/16/2006 10:58:39 AM

Murphy Oil (MUR) $45.76 -4.24% Link ... Tab Gilles updated traders with last night's news of production cuts (see story) Link

I show the MUR Jan07 $45 Calls (OBY-AI) currently bid/offer $6.10 x $6.40 with 11 contracts traded.

Tab Gilles : 3/16/2006 10:51:06 AM

Murphy Oil (MUR) Question...has all the bad news been factored into the price now? Still within congestion zone, I would really like to see a break above the $48 level. We could still see $44 on the downside. Link

weekly... Link

$WTIC weekly Link $DJUSEN weekly Link

Jeff Bailey : 3/16/2006 10:50:57 AM

Current OPEN MM Profiles found at this Link

Jeff Bailey : 3/16/2006 10:34:39 AM

10-year yield ($TNX.X) alert down 5.7 bp at 5.674%. Sets up for test of WEEKLY S2.

Jeff Bailey : 3/16/2006 10:32:21 AM

EIA Weekly Nat. Gas Storage at this Link

Jeff Bailey : 3/16/2006 10:08:30 AM

10:05 Market Watch found at this Link

Jeff Bailey : 3/16/2006 9:56:37 AM

Murphy Oil (MUR) alert $46.00 -3.74% ... haven't checked their March option chain.

Jeff Bailey : 3/16/2006 9:54:15 AM

Expiration Manipulation Game Wal-Mart (WMT) ... Here's a 10-minute interval chart of WMT into March's option expiration at this Link

Jeff Bailey : 3/16/2006 9:47:58 AM

Wal-Mart March Options Montage found at this Link ... Potential trade later this afternoon for the March $45 Calls, but need $0.30 or lower (more with chart to follow)

Jeff Bailey : 3/16/2006 9:41:11 AM

GOOG March Option Montage found at this Link

Jane Fox : 3/16/2006 9:06:56 AM

Dateline WSJ The Federal Reserve's first meeting under Ben Bernanke is likely to look a lot like its last meeting under Alan Greenspan: another interest-rate increase with the door left open to more.

U.S. and foreign economic growth are better than Fed officials expected a few months ago, and inflation, though steady, is at the high end of many officials' preferred range. That should prod them to continue the string of quarter-percentage-point increases in the Fed's short-term-rate target that began in June 2004 under Mr. Greenspan.

Markets are counting on an increase at the March meeting and also put high odds on a boost to 5% at the May 10 meeting. Fed officials appear comfortable with those expectations, but don't have strong convictions.

The statement released after the Jan. 31 meeting said that rising "resource utilization" and higher energy prices had the "potential" to fuel inflation, and that further rate increases "may" be needed. That language continues to reflect the view of some officials that a higher inflation rate is a bit more of a risk than weaker growth, and their next move could be another rate increase or a pause.

Jane Fox : 3/16/2006 8:51:12 AM

Dateline WSJ U.S. consumer prices rose at a slim pace last month thanks in part to lower energy prices while underlying inflation remained muted, suggesting that higher energy costs over the past year haven't spilled over to broader price pressures.

The February consumer price index rose by a seasonally adjusted 0.1%, after increasing 0.7% in January, the Labor Department said Thursday. The core index of prices, which excludes food and energy items climbed 0.1%, slightly below expectations, after a 0.2% rise the previous month.

Consumer prices stood 3.6% higher than a year ago. Core prices rose a more modest 2.1% in the 12 months ending February.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, were unchanged in February. Average hourly earnings rose 0.3%. Average weekly hours were down 0.3%.

Though core inflation remains at the high end of the Fed's comfort zone, Thursday's data suggest price pressures haven't yet taken firm hold throughout the economy, which may ease concerns of Federal Reserve policy makers. The Fed has raised rates 14 straight times to 4.5% and is widely expected to raise them again at its March 27-28 meeting to 4.75% and in May to 5%.

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