SPY Max Pain 01/28 ~ 02/11 (2022 W4-5)
Updated
This is a first elaborated out and attempted to be simplified as much as possible (so the same process can be repeated for similar guidance under the same assumption).
Assumption: The week close (this could be literally the last minute of the day, so 'it not being there' on Friday afternoon before close doesn't matter) will be near 'max pain' - the point at which the most options will lose the most extrinsic value possible at expiry- and lose all options buyers the most money, while maximizing what the hedged sellers retain. While implied by some sources to be potentially malicious (though not explicitly so, whatsoever), it more seems to me like it is a natural movement of the markets and a natural result of mathematics + the "entropy" of solving for the lowest common divisor.
This charts the next two weeks relative to Options expiry (because any further and predictions become needlessly superfluous at this detail). This is assuming a mostly sideways movement which ends at the expiries each Friday. If the price moves dramatically, especially so dramatically that it crosses the upper green or lower red bounding bars, then the chart is essentially moot and whatever backup hedge must be performed if I am not already biased in that direction.
In this case, since the foreseeable month or so or two even from now are mostly upwards (445~460), any significant dip is probably worth buying into, but only if I still hold an opposite hedge. This is just in case I am holding 3-4 calls, and not selling any, and have 1 put; even in a disaster situation the single put can sometimes outprice all three calls if the volatility and crash is harsh enough, and at least get me closer to neutral. Other strategies with put credit spreads etc need testing.
Because this comes with the express understanding that it is incredibly likely that the price will only move up to expiry in the last two or three minutes of the day, such as this past Friday the 28th (441 was the max pain; so a perfect close). I was able to sell and buy a put in the last 20 seconds while I held the calls for the next week. So even if I am incorrect, the put should easily balance it out; then I can hold the put(s) and have that as my max risk for further upside, even if I sell all calls. Preferably I would want to hold onto at least some, but greed murdered me in December, so careful I should be.
Mostly for my own record and so I can see whether the predictions had any veracity, though the predictions are mostly for fun. They are not needed to perform the strategy. However, from here on, I will need to count the success rate of the predicted op-ex value and how far it ended up from it, and in what direction. That way, I can adjust my uncertainty.
~ Sofie <3
Assumption: The week close (this could be literally the last minute of the day, so 'it not being there' on Friday afternoon before close doesn't matter) will be near 'max pain' - the point at which the most options will lose the most extrinsic value possible at expiry- and lose all options buyers the most money, while maximizing what the hedged sellers retain. While implied by some sources to be potentially malicious (though not explicitly so, whatsoever), it more seems to me like it is a natural movement of the markets and a natural result of mathematics + the "entropy" of solving for the lowest common divisor.
This charts the next two weeks relative to Options expiry (because any further and predictions become needlessly superfluous at this detail). This is assuming a mostly sideways movement which ends at the expiries each Friday. If the price moves dramatically, especially so dramatically that it crosses the upper green or lower red bounding bars, then the chart is essentially moot and whatever backup hedge must be performed if I am not already biased in that direction.
In this case, since the foreseeable month or so or two even from now are mostly upwards (445~460), any significant dip is probably worth buying into, but only if I still hold an opposite hedge. This is just in case I am holding 3-4 calls, and not selling any, and have 1 put; even in a disaster situation the single put can sometimes outprice all three calls if the volatility and crash is harsh enough, and at least get me closer to neutral. Other strategies with put credit spreads etc need testing.
Because this comes with the express understanding that it is incredibly likely that the price will only move up to expiry in the last two or three minutes of the day, such as this past Friday the 28th (441 was the max pain; so a perfect close). I was able to sell and buy a put in the last 20 seconds while I held the calls for the next week. So even if I am incorrect, the put should easily balance it out; then I can hold the put(s) and have that as my max risk for further upside, even if I sell all calls. Preferably I would want to hold onto at least some, but greed murdered me in December, so careful I should be.
Mostly for my own record and so I can see whether the predictions had any veracity, though the predictions are mostly for fun. They are not needed to perform the strategy. However, from here on, I will need to count the success rate of the predicted op-ex value and how far it ended up from it, and in what direction. That way, I can adjust my uncertainty.
~ Sofie <3
Note
Forgot. The put/call ratio is how I biased the prediction. >1 = more puts to calls, therefore it should significantly go higher. ~1 = should stay neutral. <1 = more calls to puts, and should significantly go lower. However, the values themselves may not match up and the ratio may not be accurate for total amount spent. Will have to see.
Trade active
2/1 was NOT an options expiry day. Noted that on options non-expiry days there can be high variability, since there is no op-ex to pin to.
Note
451 had excess net calls. So this move actually made a lot of sense in this framing. This is remarkably accurate but only for options days where the predicted max pain did not deviate due to other market conditions; the 458 top was also a reasonable call I believe (460 made sense, but since people expecting 460 will sell early, 458 makes more sense). However, since we are very close to the 11th (op-ex is now $453) and also very close to the opex, I doubt we will see much more turbulence. but i hesitate to call a 451-456 range as if either end takes profit, max entropy could gravitate up or down; and inflation cpi could actually push us UP temporarily cuz of how many puts will get bought or that may be what we're experiencing already. inflation cpi is not really worrisome i would be more worried if we were NOT experiencing inflation. but y'know kale is too expensive or whatever
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.