It's max pain time.
Every month as we approach monthly options expiration, I go through an exercise to evaluate the open interest of puts and calls to help determine the likely short-term direction of equities. It provides me no guarantee. Rather, it serves as another tool in my trading arsenal.
One month ago, there were mixed results. Both the SPY and QQQ had max pain levels that suggested we'd potentially see selling. It never happened. The upside move was limited, but there was little selling. However, two individual stocks that were featured as potential beneficiaries saw big advances (there was heavy put interest).
As we can see with hindsight, this wasn't a major turning point for AAL, but all the net puts and bearishness may have aided the stock in its near-term rise. A 12% move higher in just 6 days is a nice trade.
After reaching max pain levels, both AAL and INTC resumed their previous struggles. Options can provide us clues about short-term opportunities as the stock market is very inefficient in the short-term. Also, it's important to point out that there were a few other max pain candidates last month, especially those with heavy call interest, that did not gravitate towards max pain levels. As I said earlier, max pain analysis provides no guarantees. But the point is to have the knowledge to make more informed trading decisions. AAL and INTC were both weak stocks and they remain weak stocks, but shorting them into monthly options expiration Friday (and the week following) was not a great idea given all the net in-the-money put premium that was on the table for market makers.
Today at 4:30pm ET, I'll be hosting our monthly Max Pain webinar for September, searching for opportunities similar to AAL and INTC. It's a members-only webinar, so consider taking advantage of our fully-refundable $7 30-day trial to check out our service. CLICK HERE for more information.
I hope to see you later today!