Max Pain

Sometimes I make money in the stock market, and sometimes I “pay tuition”. Today’s lesson is: if you own an equity, pay attention on the 3rd Friday of the month (when options expire).

Here’s the chart for CWTR, a stock I owned until about 10:15 this morning:
CWTR Chart

Just after 10AM the stock dropped 10% on big volume, triggering my stop-loss order. To add insult to injury, it pretty much recovered right away. I was “shaken out.”

Dissapointed, I went hunting for the bad news that must have caused this. There was nothing to be found. It seemed like there was no reason for this behavior.

And then I learned about the Theory of Maximum Pain.

Tomorrow is the 3rd Friday of the month. There were a lot of in-the-money $30 calls set to expire tomorrow. Whoever had written these calls was incredibly lucky that they got this opportunity to buy them back at-the-money.

This post from the Yahoo Message Boards pretty much says it all.


1 Response to “Max Pain”

  1. 1 Bheeshmar December 15, 2005 at 2:00 pm

    Check out AMD’s chart for today, same thing… 🙂 30 tomorrow?

Comments are currently closed.

%d bloggers like this: