Why I believe so much in charts

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 TheStreet.com.

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 via  The 20 biggest and most active Apple-trading hedge funds – Apple 2.0 – Fortune Tech.

This excellent  article by Philip Elmer-Dewitt is a good example of why the average trader will never figure out what’s going on.  This is WHY Charts are important.  You can get caught up in the unknowable.  There are so many giant piles of money playing so many different games with any one stock, ETF,  or even market at any point in time that trying to make order out of the day-to-day chaos is impossible. I don’t believe anyone of these hedge funds has any better chance of racking up gains than me or for that matter you on Apple Computer if you know how to read the charts.  Take a look at my study of the technical indicators that do work at the Investment Survival Guide .     Besides having a fundamental bias I am a strong believer in timing of your buys and sells.  As a fund manager, I strive to find the equilibrium point between my capital inventory turnover and the maximum ROI on any one stock.  There is no question about the excellent fundamentals with Apple.  It’s all about timing.  I have a very small position now.  I could change that quickly and if I do, I’ll tweet about it so follow me on Twitter at @saxangle if you want to be alerted to this.