What Is Open Interest, Max Pain and Pinning

The increase in weekly options has caught the attention of many traders as a potentially quick way to make money without the larger premiums coupled with monthly options. Many people are already familiar with and use maxpain as a way to gauge what the price of a stock may be at the close on Friday expiration. Knowing there is a probable chance that a stock will “pin” at certain price can help traders develop profitable trading strategies. However, there is a better wait to determine where a stock will pin on Friday than by looking at max-pain and that comes by viewing it’s open interest.

Any technique involving stocks has inherent risk; to throw in short term option trading definitely increases that risk. Trading successfully involves finding an “edge,” a tool that enhances your chance of being correct about a trade that other people don’t possess. Being able to identify where a particular stock will likely close on Friday expiration and/or knowing where it won’t close is an art that can be done through the use of open interest pinning.

Below I display the maxpain and graph the open interest of several large cap momentum stocks as well as some less popular liquid stocks to see they compare in determining the best Friday closing price. All information involves the expiration for September 28th 2012.  (note: all maxpain numbers come from the iMaxPain application).

Let’s begin with AAPL

AAPL’s range based on its highest open interest was 665 – 700. However, we can narrow that down a bit more to 665 – 690 by using the 2nd highest OI on the call side, which likely stands in the way of the price getting over it by expiration. On this graph the put and call open interest meet on all points from 675 to 685.

  • Maxpain was 680
  • AAPL closed at 667.10

In this example knowing the open interest range was more helpful than knowing the maxpain.

AMZNAMZN’s range based on its highest open interest was 250 – 260. The put and call open interest met at 255.

  • Maxpain was 255
  • AMZN closed at 254.32

In AMZN’s case, both maxpain and using its open interest would have worked well.

GOOG

GOOG’s range based on its highest open interest was from 740 – 770. Narrowing that down to a smaller range using at least 3,500 open interest would take the range to 750 – 760. On this graph the put and call open interest meet at 755.
  • Maxpain was 750
  • GOOG closed at 754.50

In this example knowing the open interest range as well as where the puts and calls crossed paths was more helpful than knowing the maxpain.

PCLN

PCLN’s range based on its highest open interest was from 620 – 640. Narrowing that down further to PCLN’s 2nd highest open interest the range becomes 625 – 635.  The put and call open interest meet at 630.

  •  Maxpain was 630
  • PCLN closed at 619.07

Trying to forecast the expiration price of a stock using any method gets thrown out the window with events such as earnings. Nevertheless, I thought it would be interesting to look at such a stock this past week.NKE reported Thursday after the bell. Although anticipation of the earnings likely affected the open interest for the week, earnings themselves could not have because open interest for Thursday’s close was the last available open interest for the week.

NKE

NKE’s range based on its highest open interest was from 90 – 100. However, given that the put side was very low in comparison to the call side, it would have made more sense to use the overlap strike of the puts and calls, which was at 95. Or if earnings were good to maybe aim for the 100 strike.

  • Maxpain was 97.50
  • NKE closed at 94.91

Despite earnings, NKE would still have been a good candidate to play by selling out of the money puts or calls using the 95 strike where they overlapped. Even if that seemed too risky, selling 100 strike calls was a good choice given the high volatility in anticipation of earnings.

MAMA’s range based on its highest open interest was from 445 – 455. The puts and calls overlapped at 450.

  •  Maxpain was 450
  • MA closed at 451.48

Assuming you could have taken in enough premium, either using open interest or maxpain would have worked; however had you sold 450 MA call strikes you would have had to keep an eye on them and close them intraday when MA was close to 450. The safer play would definitely have been using the open interest range.

JPMJPM’s range based on its highest open interest was from 40 – 42. Narrowing the range to the highest put open interest and 2nd highest call open interest is 40 – 41. They cross between 40.5 and 41.

  • Maxpain was 41
  • JPM closed at 40.48
    In this case using the highest put open interest and the 2nd highest call open interest would have been ideal.

And finally, there is SPY, an extremely liquid vehicle that is tracks the S&P 500 and watched daily by every trader, institution and media outlet. Surely that couldn’t pin could it? 

The range based on SPY’s highest open interest was from 141 – 149.5. Given several high open interest strikes, the range could have been narrowed to either 142.5 – 147 or possibly even narrower to 144 – 145.5.

  • Maxpain was 145
  • SPY closed at 143.97.

With regard to the SPY, using the 2nd range would have been ideal; however, even using the narrowest range would have worked because SPY closed $.03 shy of falling within the range of 144 – 145.5.

As you can see from above, it appears that using a stocks open interest put and call range to create option plays could be very useful.

For more about Options Pinning and how it has changes since weekly options began trading see here.

For a weekly preview as to where SPY will likely close each week see here.

To learn more about using open interest for trading options and to receive daily commentary including real time trade alerts subscribe to SassyOptions Premium.

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5 Enlightened Replies

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  1. HShankle says:

    This is awesome info. Really interested in learning more about open interest

  2. MichelleL says:

    This is really nice information. Thanks for providing this. I will keep seeing what you post.

  3. LT says:

    great article..thank you so much. continue the great work

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