No Max Pain, No Max Gain: Stock Return Predictability at Options Expiration
62 Pages Posted: 27 Jun 2022 Last revised: 9 Nov 2023
Date Written: June 18, 2022
Max Pain price is the strike price at which the total payoff of all options (calls and puts) written on a particular stock, and with the same expiration date, is the lowest. We construct a measure of (potential) Max Pain gain/loss, sort stocks according to this measure, and find that a spread portfolio that buys high Max Pain stocks and sells low Max Pain stocks generates large, positive and statistically significant returns and alphas. Our results provide strong evidence of stock return predictability at the expiration of the options. Finally, we find that these returns reverse after the options expiration week. This is all consistent with stock manipulation on the part of market participants with short option positions. Specifically, the Max Pain strategy is more profitable when traders have large written positions of Max Pain options around expiration. Our results are especially strong for relatively small and illiquid stocks.
Keywords: Max Pain, stock price pressure, manipulation, option expiration
JEL Classification: G12, G13, G14, G23.
Suggested Citation: Suggested Citation