Can You Feel The Pain?

What's up my people!  Man, being a Super Dad is tough sometimes!  This morning I woke up at 4:00 AM to take my oldest daughter to a kids Triathlon.  The First Coast Kids Triathlon here in Jax, FL is the largest kids Tri in the country.  I am SUPER proud to say my daughter won first place for her age!  She worked really hard and deserved that big Dairy Queen Blizzard she destroyed after the race.  Well, lets talk options.

This week I scored another good spread on the S&P 500 ETF known as the SPY.  I entered a 171/174 Bear Call Spread on Monday that expired worthless on Friday.  The SPY closed somewhere in the 165 range for the week so my spread was never in any danger.  I think I'm really starting to like using weeklies instead of monthly spreads.  The time decay is really fast and over the course of the month it appears I can make a little more income than using a monthly spread.  Having a good low cost broker really helps with the weeklies.  I mentioned in a previous post I use E-Option.  They are the lowest no frill broker out there.  And no, I'm not getting paid to push E-Option in case you're wondering.

Anyway, I came across this theory called Maximum Pain.  If you've heard of this and use it to come up with trade ideas let me know.  In essence the theory goes like this..

1. There are market makers (the people that make the real dough) who trade lots of options.

2. There is always going to be a point, more specifically a particular option strike price, where the market makers would lose the least amount of money at option expiration.

3. Seeing that the market makers don't like losing money, they will execute trades to move a stocks price (aka manipulate it) to the point (strike) where they will have the lowest loss.  This magic strike price is called Maximum Pain.

There are a lot of free websites that allow you to calculate the Max Pain for a particular stock for each weekly option expiration.  The question is how can you use this to your advantage?  Here's what I did this week.  I determined that Max Pain for the SPY weekly option expiring on Friday was 165.  On Thursday afternoon the SPY was trading over the 166 price point.  Max Pain theory told me that the SPY should be moving down by the end of trading Friday, right?  So, what I did was buy 10 puts (at 166 strike).  If you've been keeping up you know that if you buy a put and the price drops you make money!

To make what's becoming a long story short, on Thursday I bought 10 puts at $39 a piece and sold them Friday for $70 a piece!  Not a bad profit for one little trade.  I risked $390 and made $700.  With an advanced order you can even automatically get out of a trade if the whole Max Pain thing doesn't work.

Next time I'll talk about the different types of advanced option orders.  I'll also talk a little more about this Max Pain thing.

Well, my kids want me to come watch Disney Channel with them!  I hope you have a good weekend!

Still waiting for my first comment!