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

 with Ilias Filippou and Fernando Zapatero.


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

Presented at:

2023 ITAM Finance Conference (expected), 2022 Boston University brown bag Seminar, 2022 ITAM brown bag Seminar.

JEL Classification: G12, G13, G14, G23.