No Max Pain, No Max Gain: Stock Return Predictability at Options Expiration

52 Pages Posted: 27 Jun 2022 Last revised: 21 Nov 2022

See all articles by Ilias Filippou

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School

Pedro Angel Garcia-Ares

Instituto Tecnológico Autónomo de México (ITAM)

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: June 18, 2022

Abstract

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. Our results are especially strong for relatively small and illiquid stocks.

Keywords: Max Pain, Stock price clustering, Options Expiration, Stock Price Manipulation, Return Predictability

JEL Classification: G12, G13, G14, G23.

Suggested Citation

Filippou, Ilias and Garcia-Ares, Pedro Angel and Zapatero, Fernando, No Max Pain, No Max Gain: Stock Return Predictability at Options Expiration (June 18, 2022). Boston University Questrom School of Business Research Paper No. 4140487, Available at SSRN: https://ssrn.com/abstract=4140487 or http://dx.doi.org/10.2139/ssrn.4140487

Ilias Filippou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Pedro Angel Garcia-Ares

Instituto Tecnológico Autónomo de México (ITAM)

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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