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Sunday, 25 July 2010

Option Pain

Posted on 05:22 by Unknown
This is Option Expiry Week and lets look at what Options Expiry is all about?

The definition for Option Pain taken from Optionpain.com is:

"In the option market, wealth transfer between option buyers and sellers is a zero-sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the market, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group."

In this definition, we can extract the following assumptions:

1. The Options Game is a Zero-Sum Game in which 1 party loses and the other party wins.
2. The Option Writers are usually big institutions with enough Capital to move the Market towards the strike price where maximum Option Buyers will get nothing.
3. This is precisely the reason we find that during many expiration, Markets are held up till Expiry day and once Expiry is through the markets stop rising or vice-versa.

Below is the snapshot from Options Oracle Tool for this expiry. The Max Pain is at 5450. This suggests an expiry between 5400 and 5500. Lets see if it comes true.

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