May's option expiration only being three days away, so it's time to reprise Max Pain Theory, and perhaps figure out how we're going to end this week. As a reminder, the Max Pain Theory is the assumption that most of the call or put options associated with an index or equity will expire worthless. Of course, to do that, the underlying instrument has to end the week somewhere above most of the open put trades, yet below most of the open call trades.

The instrument we'll be using? As usual, the QQQQ's, the NASDAQ 100 Trust. They're probably the most liquid and highly traded of all the index-type of securities, and the same can be said about its options.

As of the end of trading on Monday, the QQQQ's closed at $45.16. So, the analysis is simply trying to determine where we're likely to be headed over the next three days.

As the open interest totals indicate below, most of the open puts are held at the $45.00 strike, while most of the open calls have a strike of $46.00, though there are more open puts than calls. In a perfect world, this means the QQQQ's will find their way somewhere between there 4:00 p.m. ET on Friday. And if you want to get really precise about it, there would be "more pain" if the QQQQ's closed above the mid-point between those two levels (or $45.50).

QQQQ May Option Open Interest


To be fair, that "more pain" decision was also prompted by the levels where the second-largest open interest was the $46 puts, and the $45 calls. Between those four options (two strike prices), the option market is likely to make a pretty good sandwich of the QQQQ's here.

You may recall from last time that the QQQQ's were so far away from the heaviest open interest, that it could have been rendered meaningless. The QQQQ's "should have" closed between $44 and $45. However, being priced at $45.16 with just three days left until April's expiry, it was going to take quite a bearish move to drag the QQQQ's to that level. And as it turns it, it didn't happen. The QQQQ's ended the week at $45.40. So, the theory is clearly not perfect.

Fast forward to today. The QQQQ's ended Monday at $46.45 -- even further above the "max pain" zone we would have expected to see last month. To get nestled in between all that open interest in May, they're going to have to fall about 2% over the next four days, or even 1% just to get under the threshold of $46. Yes it's possible, but that's going to take a lot of work.

Price Headley is the founder and chief analyst of BigTrends.com.