What is Option Pain?
Before understanding “Options Max Pain Theory”, it is important to understand the meaning of “Options Pain”.
It is seen that 90%+ options expire out of the money. Since most options buyers lose money in options trading, the price of the underlying stock somehow must be adjusted / manipulated to close in a way that benefits option writers at the time of options expiry.
The loss incurred by options buyers is also termed as “Options Pain” for our discussion.
What is Options Max Pain Theory?
Options Max Pain Theory suggests, “On option expiration day, the underlying stock price often moves toward a point that brings maximum loss to option buyers.”
How to calculate Options Max Pain Strike Price?
We need to calculate the strike the price at which the option buyer loses the maximum amount of money. This is also the point at which option writers will payout the least amount of money.
Illustration coming soon…
How can a trader benefit from “Max Pain Theory”?
Traders can utilize this concept to their advantage. Option writing can be done near expiry based on this theory, provided other technical indicators also favor the trade.
No trade should be taken without extensive study (of technicals or fundamentals of the underlying).
Interpretation of the above chart:
With the help of above charts you can identify the strike price corresponding to max pain point in options. The “Options Max Pain” charts are available for all derivative stocks in the “Options Max Pain Chart” above.