By Philip Elmer-DeWitt
May 27, 2011

Who’s behind the weekly Max Pain phenomenon that has become the tail that wags the dog?

In our ongoing quest to understand what part the trade in weekly Apple (AAPL) options plays in keeping the company’s stock price from reflecting its performance (see here, here and here), we had a chat the other day with Mark Sebastian, a former market maker at the Chicago Board Options Exchange who posts frequently on

He’s been encouraging individual investors to piggyback on an options trading strategy some large, as yet unidentified, players have been pursuing that generates steady profits when Apple trades up and down within a relatively narrow range. (See Max Pain.)

The scheme, which typically involves buying and holding several different options in a range of strike prices (see, for example, the iron butterfly), was probably developed, he says, by “a couple of options-oriented hedge funds.”

“They’ll keep playing it,” he says, “until it doesn’t work anymore.”

Which hedge funds would those be?

The SEC doesn’t know, the CBOE won’t say and Sebastian didn’t care to guess. But we might be able to narrow the field somewhat by looking at which hedge funds hold the most Apple shares and which were the most active AAPL traders last quarter.

In the charts above, drawn from tickerspy data for Q1 2011, a hedge fund run by Goldman Sachs (GS) sticks out. Not only did it hold the largest position in Apple, by far, of any hedge fund at the end of the first quarter — 5.8 million shares worth more than $2 billion — but it was the second most active Apple trader of the lot after Citadel Investment Group, selling 1.3 million shares in the space of three months.

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