Max Pain in Options Explained
Traders use the max pain options point to help determine where a stock will close upon an options expiration date.
What is Max Pain in Options?
Max pain is a concept in options trading that seeks to predict the price that an underlying stock will gravitate toward at expiration.
The theory suggests that at expiration, option buyers who hold their contracts until expiration will experience the most pain, which is when their options expire worthless.
The max pain point is derived from the option strike price where the put and call options have the most open interest.
The Maximum Pain Theory
To understand how the max pain theory works, consider the example of a market maker who sells a call and put option at the $100 strike price.
If the stock price rises above $100, the market maker will sell shares to push the price back toward $100, and if the stock price falls below $100, the market maker will buy shares to push the price back toward $100.
By doing so, the market maker can increase the likelihood that both the call and put options expire worthless, allowing them to keep the premiums collected when they sold the options.
How to Calculate Max Pain
To calculate the max pain point, you need to follow the steps below:
1- Determine the in-the-money strike prices
First, you must identify the in-the-money strike prices for a particular stock’s put and call options. The in-the-money options are those with strike prices that are below (for calls) or above (for puts) the current market price of the underlying stock.
2- Calculate the difference between the stock price and each in-the-money strike price:
Next, you need to calculate the difference between the underlying stock price and the strike price for each in-the-money strike price.
3- Multiply the result by the open interest
After finding the difference for each in-the-money strike price, you need to multiply each difference by the open interest for that strike price. Open interest refers to the number of currently outstanding contracts.
4- Sum up the results
Add up the values you obtained in step 3 for all in-the-money strike prices to find the total outstanding value of puts and calls.
5- Determine the max pain point
The strike price with the highest dollar value of outstanding puts and calls is considered the max pain point. This is the price at which options sellers will try to push the stock price towards expiration to make their options expire worthless.
It is important to note that calculating max pain manually can be a time-consuming process, especially for stocks with many option contracts. Therefore, many traders use automated software to calculate max pain points.
The Best Max Pain Calculator
Swaggy Stocks has an online tool that calculates the max pain point for any stock using open interest data. The Max Pain Calculator is an easy and efficient way to see the max pain point without manually calculating it.
The most common stock people check the max pain for is $SPY since it represents the overall market.
You can use the free SPY max pain calculator from Swaggy Stocks to automatically find the max pain point each trading day.
Before you go
You can get all my stories sent directly to your inbox by clicking here!
If you enjoy reading stories like these and want to support me as a writer, consider becoming a Medium member. The membership is $5 a month, giving you unlimited access to stories on Medium. If you sign up using my link, I’ll earn a small percentage.
Subscribe to DDIntel Here.
Visit our website here: https://www.datadriveninvestor.com
Join our network here: https://datadriveninvestor.com/collaborate
