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No Max Pain, No Max Gain: Stock Price Predictability at Options Expiration

Abstract:

 with Ilias Filippou and Fernando Zapatero.

Given all the options with the same expiration written on a particular stock, Max Pain price is the strike price at which the total payoff of all the expiring options is the lowest. We construct a measure of Max Pain, sort stock prices according to this measure, and find that a spread portfolio that buys high Max Pain stocks and sells low Max Pain stocks generates large, positive, and statistically significant alphas. Our results provide strong evidence of stock price predictability at the expiration of the options. We also find that there is significantly higher abnormal stock volume and order imbalances for high Max Pain portfolios. The strategy is not related to reversals of price trends that might have explained initial options volume. Our results are robust to a large number of tests.

Presented at :

2022 ITAM brown bag Seminar

Keywords:  Max Pain, stock price clustering, Options, Stock Price Manipulation.
JEL Classification: G12, G13, G14, G23.

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