What is Max Pain in Options Trading?
If you’ve ever looked at an options chain and wondered why prices seem to gravitate toward certain strike prices on expiry day โ you’re not alone. What you’re witnessing may be the effect of Max Pain.
Letโs break it down in plain English.
What is Max Pain?
Max Pain (also called the Option Pain Point) is the strike price where the combined value of all open call and put options is lowest โ i.e., where option sellers (usually institutions) lose the least, and option buyers (retail traders) lose the most.
On expiry day, prices sometimes tend to move closer to this level, though it is not assured.
Why is Max Pain Important?
1. Predictive Tool Near Expiry
Max Pain can help you estimate where the stock/index might settle on expiry.
2. Understand Market Psychology
It tells you where the largest concentration of unwinding or losses might occur โ valuable info for traders.
3. Institutional Footprint
Since option sellers are usually large players (and more profitable), following Max Pain can show you where theyโre positioned.
How to Calculate Max Pain (Step-by-Step)
You’ll Need:
๐ธ An option chain (with strike-wise Open Interest data for both Calls and Puts)
๐ธ A simple spreadsheet or calculator
Quick Example
Letโs say NIFTY is at 24,950.
| Strike | Call OI | Put OI | Max Pain Loss (Simplified) |
|---|---|---|---|
| 24,800 | 12L | 14L | โน55 Cr |
| 24,900 | 10L | 13L | โน42 Cr |
| 25,000 | 9L | 10L | โน39 Cr Lowest |
| 25,100 | 7L | 9L | โน48 Cr |
Here, Max Pain = 25,000, because total pain to buyers is lowest here โ meaning sellers are safe, and price might settle near this.
Letโs walk through a detailed example on how to compute the max pain
Imagine a stock is trading around โน100. Hereโs some simplified Open Interest (OI) data for a few strike prices:
| Strike Price | Call OI (Lots) | Put OI (Lots) |
|---|---|---|
| โน95 | 1,000 | 300 |
| โน100 | 800 | 800 |
| โน105 | 600 | 1,000 |
We’ll now compute the total loss to option buyers if the stock expires at each strike.
If Stock Expires at โน95
Call Buyers:
๐ โน95 CALL: In the money โ 0 loss (they gain)
๐ โน100 CALL: OTM โ loses full premium โ 800 lots ร โน5 = โน4,000 loss
๐ โน105 CALL: OTM โ loses full premium โ 600 ร โน10 = โน6,000 loss
Total CALL Loss = โน4,000 + โน6,000 = โน10,000
Put Buyers:
๐ โน95 PUT: ATM โ 0 loss (they get full value)
๐ โน100 PUT: In the money โ 0 loss
๐ โน105 PUT: In the money โ 0 loss
Total PUT Loss = โน0
Total Buyer Loss @ โน95 = โน10,000
If Stock Expires at โน100
Call Buyers:
๐ โน95 CALL: ITM โ no loss
๐ โน100 CALL: ATM โ 0 loss (break-even)
๐ โน105 CALL: OTM โ loses full premium โ 600 ร โน5 = โน3,000
Total CALL Loss = โน3,000
Put Buyers:
๐ โน95 PUT: OTM โ loses full premium โ 300 ร โน5 = โน1,500
๐ โน100 PUT: ATM โ 0 loss
๐ โน105 PUT: ITM โ no loss
Total PUT Loss = โน1,500
Total Buyer Loss @ โน100 = โน4,500
If Stock Expires at โน105
Call Buyers:
๐ All are ITM โ no loss
Total CALL Loss = โน0
Put Buyers:
๐ โน95 PUT: OTM โ full loss โ 300 ร โน10 = โน3,000
๐ โน100 PUT: OTM โ full loss โ 800 ร โน5 = โน4,000
๐ โน105 PUT: ATM โ break-even โ no loss
Total PUT Loss = โน7,000
Total Buyer Loss @ โน105 = โน7,000
Final Comparison
| Strike Price | Total Buyer Loss |
|---|---|
| โน95 | โน10,000 |
| โน100 | โน4,500 Lowest |
| โน105 | โน7,000 |
The strike with lowest total buyer loss is โน100 โ this would be identified as the Max Pain level in this example scenario.
In Simple Words:
For each possible expiry strike:
โ Assume all OTM options expire worthless.
โ Multiply OTM OI ร premium lost (estimated or actual).
โ Sum for all strikes โ the strike with lowest total loss = Max Pain
Summary
| Term | Meaning |
|---|---|
| Max Pain | Strike where option buyers lose most & sellers lose least |
| Used For | Expiry day prediction, trading bias |
| Best Used | Near expiry, with price action and OI confirmation |
| Tool Needed | Option Chain + basic calculator (or ready-made tool) |
Tools to Track Max Pain Automatically
You donโt have to calculate it manually every time.
Some platforms, including Navia, offer option chain tools that display Max Pain levels and charts for easier tracking.
Real Example of a Max pain Chart;
Source: niftytrader
Pro Tips
๐ธ Max Pain is not a guarantee, just a useful indicator.
๐ธ Combine it with OI shifts, volume, and price action for better accuracy.
๐ธ Works best when there’s 1โ2 days left before expiry.
Final Thoughts
Max Pain gives a glimpse into how the big players (option writers) are positioned and how markets may behave around expiry. While itโs not a magic formula, itโs a smart addition to your trading toolbox โ especially when paired with other indicators.
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DISCLAIMER:ย Investments in securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Full disclaimer:ย https://bit.ly/naviadisclaimer.
