Time For Some Market Maker Magic?

I always find monthly options expiration week to be one of most amazing experiences of stock market trading.

Retail traders unknowingly follow each other down a rat hole during both uptrends (buying calls) and downtrends (buying puts). Then we reach the day of reckoning (options-expiration Friday) when market makers have a TON of potential profit at stake. When traders buy puts during downtrends, it's quite likely that market makers sell those puts and then short the equivalent number of shares to protect against price deterioration. But as options expiration approaches, it makes perfect sense to me that market makers can (1) cover (buy) their shorts at a profit, (2) use their capital and buy to intentionally drive the price higher in the very near-term, and (3) reap a windfall as net put premium drops significantly as equity prices rise. This is a win-win-win for market makers and helps to explain the day-of-the-calendar-month seasonal pattern that I so often discuss. Check out the current chart of Advanced Micro Devices (AMD) and its "max pain" point:

Enter Advanced Micro Devices, Inc. (AMD):

By our calculation, there is over $250 million of net in-the-money put premium currently on AMD. When I look at this chart, I see UGLY. There's nothing really attractive about the chart, other than it's very oversold. However, there is financial incentive for market makers to see a quick rebound. The red arrow highlights a simple 20-day EMA test that would eliminate much of this net put premium. Also, the early-October failure by AMD at the 70 level shows price resistance there. I'm not saying that AMD will be 70 bucks by Friday, but what I am saying is that market makers have a significant profit opportunity if AMD begins moving in that direction. Max pain is not a price guarantee, it's a DIRECTIONAL CLUE. In other words, there is ZERO chance that I'd be short AMD right now, whether it goes down or not doesn't matter. It's the RISK that I'm concerned about. I will not be surprised to see a rally in AMD shares over the next week to ten days.

One word of caution, however. If we lose the low established on Thursday morning, after that hot CPI report, all bets are off, so be sure to keep stops in play.

Happy Trading! Tom Bowley Chief Market Strategist EarningsBeats.com Better Timing. Better Trades.