RE:RE:RE:The Algo Storm on the US side todayI want to point out what a difference a month of options trading makes to Max Pain, as we look at where it sits today.
The Max Pain figure for March has changed substantially due to the change in the remaining options open interest on SU as we get closer to expiry.
Most importantly, there is no large displacement between max pain and the current share price skewed to the downside as we saw a month ago, which may have presented underwriters a juicy opportunity to benefit and cash in by driving the share price down on OpEx day, March 18.
Even though the SU share price has increased $2 in a month, total calls that are now in the money are less than half at 11329 contracts, vs. 26573 before. Puts in the money have increased from 662 before to 1217 now. It seems a lot of traders sitting on profits have sold their in the money calls and cashed out before expiry, like I did.
On Feb 5, 22 max pain for each expiry in US$ vs today, March 4, at yesterday's $30.94 close:
Max Pain:
March 18 expiry:
was $19 , Now $28 June 17 expiry: was $20 , Now $22
Sept 16 expiry: was $27 , Now $26
Dec 16 expiry: was $22 , Now $25 (still very small open interest)
I was going to reload and buy some more SU call options for an expiry later this year. However, while window shopping and reviewing current option pricing, I see now that option prices are eye popping, as the VIX has blown up so large recently. The time decay premium (Theta) is so costly to hold these, that it would make much more sense to leverage without any theta premium by buying the stock using your margin of 30% instead, and pay deductable bank interest, which is covered by the dividends from the shares anyway.
With such a high theta, some might consider now at this moment to take advantage of it, and lock in some profit by selling some covered out of the money calls on your current SU positions while you sit back and collect the dividend. This way, YOU get to keep the theta, not the underwriter. Be warned, athough you might keep the proceeds from the sale of your calls, if the sails of Suncor finally catch some wind and catch up with oil prices, you will wave goodbye to your shares on expiry at the strike price you set in the future.
As real options prices can only be seen during trading hours, have a look and check out the option prices and abnormally wide spreads between bids and asks during the live market today.
Cheers
MigraineCall wrote: OK, glad to help.
You have heard of trading days leading up to option expiration where prices have abnormal moves, also triple witching, quadruple witching, etc. These can be crazy days as the underwriters of the sums of billions worth of options contracts must pay out those options holders that are in the money. It is in their best interest to use their powerful means to move stock prices towards a point causing the maximum pain for holders of puts and calls, where the stock price causes the largest number of finacial losses for all option holders. The price is called Max Pain'.
As expiration approaches, option writers may try to buy or sell shares to drive the price toward a closing price that is profitable for them, minimizing the payouts to option holders.
There are many things to consider of course before they undertake to spend loads of cash to do this. Things like their exposure value ratio, basically the proportion of the option contract open interest to the float. Also the average daily volume, whether the option exposure bias is in line with other the max pain of options of other companies and the sector, as well as timing of market moving announcements like Fed days, etc.
The Max Pain calculation is easy but time consuming. Some websites do this, the best now charge for the data. Here is example of one that seems to be free for the US side, although basic.
https://maximum-pain.com/options The most important option days to focus on are on the third Friday of every month, and even more if it is quarterly, as they tend to have the most open interest and most subject to manipulation.
In the case of Suncor, you must consider options held on the Canadian side as well. Looking at March 18 2022, the Canadian put/call open interest appears to be skewed the same way as it is on the US side, heavy with in the money calls by nearly the same amount, and around 5:1 ratio of calls to puts in the money. An effort to drive the price down at expiry would benefit underwriters on both sides, perhaps it is even the same underwriter.
The Max Pain price for Suncor on March 18 according to the indicator is around $19 US, which represents a huge drop from today's price.
Looking at the US option chain for March, there are currently 26573 contracts of calls in the money, while only 662 puts in the money.
That works out to share values of 26573 * 100 * 28.72US$ = USD $76,317,656 in the money on the call side.
Put side is 662 * 100 * 28.72$USD = $1,901,264 in the money puts.
With the current open interest in the US and Canada, I would estimate that the underwriters stand to lose perhaps $40-50Million USD at today's $US price of $29 in March alone. Yet, it is perhaps still too small of a loss to justify a risky short attack, and they may just eat it.
They may have trouble convincing their risk managers to short and smash SU, since it is already trading at rock bottom valuations, and has so much potential upside remaining to catch up with the peers in the industry. With a great dividend, guidance, excess FCF, and oil at +$90 WTI and $100WCS, covering at higher prices may be far more costly than bearing the multi million loss.
Looking at Max Pain for other Suncor US side option expirations in 2022, this month Feb is a wash at $28USD, March is $19 max pain, June $20, Sept $27, Dec $22 but with less open interest. Cheers
topdown99 wrote: Good evening Migraine , good post man , very interesting . I wonder if you would expand on that idea regarding the open interest currently in the money , what is the "pivot price" as you read the situation . I'll say thanks in advance hoping you follow up on this . Cheers