I'll say it again. The effect is real and must be accounted for if you hold options for equities on the last day. People can learn from voices of experience or idly theorize based on emotions. Market manipulators love emotional traders and people who think the world is a fair game.
A stock doesn't have to close at a strike price to have been manipulated in this way. What will usually be observed is a stock that is say .50-.70 cents above a popular strike will drift downwards to some point closer to the strike near end of day. One additional aspect is sometimes the last few minutes the manipulation ends and prices rebound quickly, but by then most holders have sold. 3 out of 25 stocks on the exact strike price is actually surprisingly high !!! Think about the odds that in a large marketplace the price wasn't even off a penny !!! Wow, that is imprsssive. Looking beyond expiry week, whole number "magnets" seem to occur in general on some stocks and this can be a day trading edge.
i did not say that max pain is a measure of illiquidity. rather the illiquidity is a prerequisite for being able to use max pain to your advantage. for that you need to use more info - some of it contained in the convex function of max pain itself (e.g. open interest per strike).
What precisely do you mean by "real"? It occurs every expiry, with every underlying? Or 70% of time? 50% of the time? Also, how do you know what experience I have or don't? As to emotion, your comment makes no sense whatsoever. Yes, agreed... I understood, but merely wanted to clarify.
3 of 25 one time is a finite sample and means nothing. Conveniently, yesterday was expiration. I dusted off some of my very old macros and exported closing prices from my database. Breaking them into $1, 2.50, $5 and $10 strike groups would be a Herculean task and I have better things to do . But making a few simple assumptions can provide a quick glimpse at distribution in a coupla minutes. There were 827 stocks that closed b/t $25 and $50. I assiduously maintain only the data of stocks I'm tracking/trading so 827 may be off by a few (options delisted, stopped trading in the past week or two due to merge/buy out, symbol change, delisting, etc.). Grant me a small fudge factor Here's a break down of the number of these stocks and their distance from the nearest dollar. 00 -05 85 05 -10 85 10 -15 90 15 -20 63 20 -25 106 25 -30 77 30 -35 67 35 -40 90 40 -45 76 45 -50 87 And FWIW, 11 closed exactly at a round dollar amount. If max pain drove stocks across the board toward the strike, you'd expect to see a lot more within 5 or 10 cts of the nearest dollar versus 40-50 cts away. You don't. That lack of clustering happens every expiration. Now you can argue that the are only a modest amount of optionable stocks with $1 strike increments and the above has no relevance. Trust me, the same even distribution occurs for distance away from strikes of $2.50 or $5. None of this is very scientific but it's a lot closer to reality than suggesting that magnetic market manipulation causes pinning. Personally, I think there are better places to look that a 15+ cent expiration effect. Now if you're making serious pin money once a month with your magic secret expiration decoder ring then more power to you.
It's obvious from your lack of spelling errors that you are inexperienced trader. Experienced traders are always in a rush and have no time to waste on a spell chucker. :eek:
Spin, Thanks for that quick and simple report. When people claim options do pin to a price, I think they always show an example where it worked or was very close. Then, when it doesn't work, they say things like "The markets didn't react as usual this time", or it was a fluke that it didn't work or whtever. Of course, they act like flukes and unusual reactions shouldn't count against them then! I haven't either ever seen much evidence or anything that pinning really happens, as compared to just prices do sometimes happen to end near a strike price. In fact, sometimes when I have looked for stocks that were exactly at a strike price so that I could research call and put pricing, I have often found it hard to find, even near expiration. In other words, I find alot of stocks at 51.67 or something, not 50.02 or 49.98. JJacksET4
spindr0, with all due respect your analysis is completely useless for this particular problem. max pain "manipulation" is NOT about pinning a stock price to the max pain strike at all costs. generally max pain is about getting as close to the max pain strike as is economically sensible. so if potential costs of moving a stock price by 50 cents outweigh the gain from decreasing (negative) market value of written calls/puts then the market maker will not engage in such exercise. so the test should not be about a distribution of closing prices around some imaginary rounded values. rather it should test the direction of the stock price moves in the last few days before exercise with respect to the max pain strike. also as i mentioned the test should be done on variously bucketed data, e.g. liquid/illiquid; buckets by option open interest(s) relative to average daily volume; etc. in other words it is not easy to perform... even if you manage to run the test (and control for all the data variability) it would be difficult to make a firm conclusion. the reason is that not all options on a particular stock are written by a (manipulating) market maker an therefore the market maker's max pain main be different to the market max pain. market maker will not push down a stock to 15 (market max pain) if he maximizes his profit when the stock is at 17... also note that various market makers have different max pains, i.e. further complicating the matter. as i mentioned earlier in the thread - max pain is useful in some specific circumstances for some specific stocks. the acumen is to find those stocks and use it to your advantage...
A good part of the trading edge is just understanding that the stocks that have run up real good in a month will likely run against that trend on expiry day, and the max pain price is in that direction. Whether the strike is reached is immaterial to the profitability of the trade ( or losses if you are hanging onto the options ).