Trading Places with Tom Bowley

Max Pain: Market Makers' Monthly Miracle

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I've seen it over and over and over again. Very short-term, almost inexplicable moves, seem to occur around the 3rd Friday of each month, which just so happens to represent monthly options expiration. When stock market traders, particularly options traders, all line up on one side of the trade, you better be prepared for sudden reversals and shifts.

Let me give you an example from each of the past two months.

On Tuesday, August 17th, Pinduoduo (PDD) closed at 79.45 and was in the midst of an onslaught of selling. It had fallen close to 40% in just six weeks and more than 60% from its mid-February high. Options traders were POURING into puts, believing PDD could go nowhere but down. On that Tuesday, PDD had nearly $80 million of net in-the-money put premium. This is what PDD's chart looked like at that time:

PDD's peer group, broadline retail ($DJUSRB) was trading at a fresh new relative low to the S&P 500 and PDD was one of the weakest stocks in the group. Volume trends were very bearish and the AD line was horrid. There was no hope and traders were piling into the puts. Well guess what? This happened....

In one week, PDD soared more than 33% and much of that net in-the-money put premium was wiped out. It's a MIRACLE!!!!

In September, it wasn't quite so dramatic, but the same basic reversal took place. Plug Power (PLUG) had been declining and had net in-the-money put premium totaling roughly $50 million as of Tuesday, September 14th. There was financial incentive for market makers to once again buy the stock to drive PLUG's price higher, eliminating millions of dollars of put premium. Care to guess what happened here? Well.....

Once again, PLUG was a lagging stock in a lagging industry group - renewable energy ($DWCREE). But another MIRACLE occurred! PLUG jumped 25% over the next 5 days and those poor lil market makers walked home with another boatload of money. Note that two weeks later, PLUG was right back down at its prior low. These options-related moves are nothing but temporary. Shortly after options expire, true demand vs. supply takes back over and order is restored. But, unfortunately, for unsuspecting traders, the damage has already been done in the form of worthless options.

Both of these stocks were discussed with EarningsBeats.com members on the Tuesday before monthly options expired. This is no longer a surprise to our members. We've seen it plenty of times before, so we prepare for it every month.

Guess what? Today is the Tuesday before October monthly options expire and we're all set to provide a new list to our members today after the close. Mr. Market is about to enter its monthly period of Dr. Jekyll and Mr. Hyde and once again reveal its split personality. Or for those who understand Seinfeld-isms, it's "Opposite George" week.

Join me later today as I discuss the Max Pain issues facing U.S. equities this week. I'll reveal a number of stock candidates that could be severely impacted by October options expiring this Friday. This is an extremely popular Members-Only event, but a simple, no-cost, 30-day trial gets you a seat. We'll get started at 4:30pm ET (room opens at 4:00pm ET). Just CLICK HERE to get your free trial started and join me for this fascinating and highly educational event!

Of if you prefer, I'll feature one of these max pain candidates in tomorrow morning's EB Digest, which is our FREE newsletter. If you'd like to try this newsletter and follow this max pain trade, simply SIGN UP here with your name and email address (no credit card required).

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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