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What Foxconn’s blast did to Apple’s Max Pain price

By
Philip Elmer-DeWitt
Philip Elmer-DeWitt
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By
Philip Elmer-DeWitt
Philip Elmer-DeWitt
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May 23, 2011, 9:00 AM ET
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A case study in how the options market reacts to breaking news



AAPL Max Pain before and after the explosion. Source: BSL

We’ve written a lot lately about how traders buying and selling options seem to be driving Apple’s (AAPL) share price (see here, here and here.) So we thought it might be instructive to look at what happened on a day when Apple’s share price took over and drove the options market — specifically, the so-called Max Pain price point where options writers make the most profit and options buyers suffer the biggest losses.

Apple’s shares have closed at or near Max Pain nearly every Friday since weekly option trading in Apple began last July, and they might have done so again last Friday if unexpected news — in the form of an explosion in a Chinese iPad factory — hadn’t intervened.

The charts above are from a slide show put together by reader Mick Blackledge, a real-life rocket scientist and veteran computer user who’s been following the Max Pain story closely. In the first chart, a snapshot taken before Friday’s opening, Max Pain stood at $340. Apple opened at $339.56 and traded within a $1 range until news of the explosion in China crossed the wires. In the second, taken after the closing bell, Max Pain has shifted to $335. Apple closed at $335.22.

For more detail, see Blackledge’s “Fast Look at Weekly Options” here.

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