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

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 stock prices 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. We also find that there is significantly higher stock trading volume and order imbalances for these Max Pain gain/loss portfolios. The strategy is not related to reversals of price trends that might have explained initial options volume. The results are especially strong for relatively small and illiquid stocks