Where Bulls and Bears Collide: AAPL's Max Pain Strikes at $180

Apple (AAPL) has been on volatile ride lately bouncing up and down between 170 and 195. However, the options market could be indicating that the stock might settle around the 180 mark over the next month.

This is due to a theory called Max Pain and is something I talked about in a recent video for Barchart.

The Max Pain Theory claims that as option expiration approaches, stock prices will get pushed toward the price at which the greatest number of options in terms of dollar value will expire worthless.

Large institutions are generally net sellers of options, so they will benefit the most from options expiring worthless, or with the lowest net value.

We can use Barchart Excel to find the Max Pain level quickly and easily for any stock and expiration.

Within our Max Pain Excel file, we simply need to input the stock ticker and the expiration date and Barchart Excel will do the rest.

The Excel file then calculates the notional value of all open puts and calls. What we are looking for is the stock price at which the puts and calls have the lowest notional value.

Barchart Excel displays this data in table format and also a graph.

Here we can see that the Max Pain level for AAPL on October 20 is right around 1.

What can we do with this information?

Well, if we think that the Max Pain theory might play out this month, we could look to trade a butterfly spread centred at the 180 strike.

Let’s take a look at how that trade idea might be structured.

AAPL MAX PAIN BUTTERFLY SPREAD

A butterfly spread is constructed by buying a lower strike call, selling two middle strike calls and buying one upper strike call. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.

The maximum profit is calculated as the difference between the short and long calls less the premium that you paid for the spread.

Using the October 20 expiry, the trade would involve buying the $170 strike call, selling two of the $180 strike calls and buying one of the $190 strike call. 

The cost for the trade would be around $360 which is the most the trade could lose. The maximum potential gain is around $640. 

AAPL COMPANY DETAILS

The Barchart Technical Opinion rating is an 8% Buy with a weakening short term outlook on maintaining the current direction.

AAPL rates as a Strong Buy according to 18 analysts with 3 Moderate Buy and 8 Hold ratings. Implied volatility is 20.56 % which gives AAPL an IV Percentile of 13% and an IV Rank of 11.50%

Apple's business primarily runs around its flagship iPhone. 

However, the Services portfolio that includes cloud services, App store, Apple Music, AppleCare, Apple Pay & licensing and other services which become the cash cow. 

Moreover, non-iPhone devices like Apple Watch and AirPod have gained significant traction. In fact, Apple dominates the Wearables and Hearables markets due to the growing adoption of Watch and AirPods.

 Solid uptake of Apple Watch also helps Apple to strengthen its presence in the personal health monitoring space. 

Apple also designs, manufactures and sells iPad, MacBookand HomePod. 

These devices are powered by software applications including iOS, macOS, watchOS and tvOS operating systems. 

Apple's other services include subscription-based Apple News, Apple Card, Apple Arcade, new Apple TV app, Apple TV channels and Apple TV, a new subscription service.

Conclusion And Risk Management

Short-term trades such as this one are difficult to adjust. Either the trade works, or it doesn’t so position sizing is vital. 

Short-term trades also have assignment risk, so traders need to be aware of that possibility.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.