EB Daily Market Report - Special Max Pain Edition - Friday, February 10, 2023
February monthly options expiration is one week from today and I believe max pain manipulation is already underway, even if a bit early this month. It seems like once we got through the more bullish part of February, the downward slide began. It's also "interesting" that the aggressive areas of the market that led prices higher in January and early February (and also naturally have the most net in-the-money call premium) are also the same areas that can't seem to catch a bid right now. For example, here are the performance numbers by key index ETF since the close on February 2nd and through 12:20pm ET today:
- DIA (Dow Jones): -0.95%
- SPY (S&P 500): -2.70%
- QQQ (NASDAQ 100): -4.60%
This might seem odd until you realize what max pain looks like for each ETF and where each ETF stood as of the February 2nd close (in parenthesis). Here's "max pain" for each, or the price level where market makers would save the most money come next Friday (February monthly options expiration):
- DIA: 335.83 (340.43)
- SPY: 398.86 (416.78)
- QQQ: 288.83 (311.72)
A week ago, the QQQ closed at 311.72 and the net in-the-money call premium totaled roughly $1.2 billion. At the 12:20pm ET low today at 297.38, the net in-the-money call premium was down to $494 million, falling more than $700 million from the February 2nd high. This tells me that there's still further downside risk, but the majority has already been eliminated. Therefore, the idea of taking on more risk (leveraged ETFs like the QLD (2x QQQ performance) and TQQQ (3x QQQ performance) is beginning to make more sense. Personally, I don't own either the QLD or TQQQ yet, but if we move lower, I will begin to replace a portion of my QQQ with a leveraged ETF. I would likely start such a process at the 20-day EMA, which is currently at 294.90, and add to leverage from the 20-day EMA down to the max pain level of 288.83, or thereabouts.
Personally, given the much larger max pain risk of the QQQ vs. the SPY or the DIA, I should have moved away from the QQQ and into either the SPY or DIA a week ago. I will very likely use the max pain info to help manage my own investments a bit better in the future and I'll keep you apprised of those moves. I'm not going to make any such changes this month as much of the max pain damage has already been inflicted.
I was looking through many of our Strong Earnings/Raised Guidance stocks and began adding small pieces of several based on the current state of their technical conditions, along with my analysis of possible max pain effects. Here's a list of several stocks you may be interested in:
ATKR:
Love the recent move lower to nearly test the top of gap support.
Max pain impact: ATKR trades few options. Of the options traded, max pain appears to be around 126-127, which might keep some out of the stock. But again, the volume is so light that I'm not expecting a big max pain impact here.
DT:
Love the test of gap support. That was huge volume on the move up.
Max pain impact: DT also trades few options, but currently shows max pain around 41 or so. DT traded at 48 recently and has the low from its earnings reaction and the rising 20-day EMA not too much further lower. I like this one down to perhaps 42.
HOLX:
It's testing a key area of price support and just a tad below its 20-day EMA, which I would expect to hold.
Max pain impact: Very little as few HOLX options are outstanding. Max pain likely resides between 80-81, but there's little money involved.
ITW:
I mentioned ITW recently. I liked it at gap support near 240 and price support closer to 234-235. The rising 20-day EMA is also at 234.51. I love the reward to risk here.
Max pain impact: There are very few options outstanding and the impact here is minimal.
PTON:
PTON gapped higher on extremely heavy volume after its better-than-expected earnings report and raised guidance. The top of gap support was nearly tested today, a full 4 dollar drop from its recent high. I like it on this return to gap support.
Max pain impact: PTON has potentially the biggest options impact of any stocks listed here. There is still considerable net in-the-money call premium left for market makers, but a TON has already vanished, because of the last week's price decline. I'd say max pain here is somewhere around 12.50 or so. Perhaps buying half and seeing if you can get another 10% off for a 2nd entry makes sense? I bought all that I wanted with no second entry.
TWOU:
The opening price after earnings was 9.83 and the intraday low was 9.52. After hitting 13 in the past week, we have another opportunity in this 9.52-9.83 range. TWOU is certainly a risky trade, but has plenty of upside.
Max pain impact: There are not a lot of options on TWOU currently, but on the small number that are out there, max pain is probably around 8.25. Perhaps the stock sees that level, but I'm buying in this 9.52-9.83 range.
WNC:
One of my favorite bank stocks during this earnings season and it came back to me. Earnings-related gap support and the rising 20-day EMA are almost the same here. Buying from here down to that 20-day EMA makes good technical sense to me.
Max pain impact: Negligible. The total number of contracts, both calls and puts, for February monthly expiration totals around 300 contracts. I can't imagine market makers will be too concerned with options expiration here.
We still have another week before February monthly options expire and a lot can change. My hope was that the market would continue rallying into the end of this week and provide us a great opportunity to get out of the market at an extended level and then jump back in after options-related selling. Well, you know what they say about the "best-laid plans", right. It never materialized so we deal with what we have.
There could still be some downward pressure on stocks, because of max pain, but much of the risk has been eliminated with this week's selling, as I discussed above. Also keep in mind that the January CPI will be released on Tuesday morning, so there's certainly fireworks possible next week. Personally, I'd rather be invested on the long side and lose money than to be on the sidelines while the market takes off. We are rapidly approaching key 20-day EMA tests on our major indices and that moving average tends to provide excellent support during uptrends.
Erin will also be providing everyone our Max Pain report over the weekend, so you can assess the max pain "conditions" for individual stocks in the Dow Jones, NASDAQ 100, and our stock portfolios.
I hope everyone has a great weekend and I'll be back next week to address the day-to-day action.
Happy trading!
Tom