Options Expiry on Friday Careful The massive number of monthly calls and puts tend to see big imbalances, especially if the S&P 500 has been trending. If you haven't been watching, the S&P 500 was just below 4300 to open October.
Last week, we pierced the 4700 level. I'll be calculating the max pain level - the point at which in-the-money call value is completely offset by in-the-money put value - later today. It's almost guaranteed to be at least 4-5% lower than where we currently stand.
Keep in mind that there are literally hundreds of thousands of open call interest below the 460 strike price level first reflected in this screen shot. Without even calculating the amount of net in-the-money call premium, I can confidently say it's likely somewhere in the $1 to $2 billion range. If the SPY continues moving higher, this number only grows even further.
A pullback into Friday or early next week would save market makers hundreds of millions of dollars in option premium. You think this doesn't matter? You'd better think again. I had calculated "max pain" to be 431.31, which suggested a potential decline of 2.66%. Just two days, the SPY gapped down and hit a low of 434.73. It never moved down to 431.31, but, as I explain to our members at EarningsBeats.com, I use options expiration week and max pain as a directional clue. It's simply another indicator to me that I absolutely want to review heading into options expiration Friday.
Trust me, market makers made a small fortune on that pullback.