Max Pain is considered as the Strike price where If the underlying Stock or index expires then the Option Buyers will face the maximum amount of losses and the Option sellers will enjoy the Maximum amount of Profits. As the name suggests Max Pain is the particular Strike Price what will cause the most amount of pain among option buyers as all the option bought bt them of that particular strike price will expire worthlessly.
Max Pain-
Max Pain is considered the Strike Price where the most amount of outstanding Call & Put options are present. It is the zone where if the Underlying Stock or Index expires then the Loss faced by the Option holders will be the highest. Max Pain Options is the particular Strike price where the Options buyers will face the Maximum Loss and the Option Sellers will get the Maximum Profit if the underlying asset lies there on the date of expiry.
The Max Pain can be calculated in only those Stocks/Indices where the trading takes place in the Derivatives segment. Without the Derivatives data, Max Pain cannot be calculated.
Max Pain is the Strike Price where both the Call & Put writers want the Underlying Asset to expire which will lead to the maximum profits for them. For this reason, the Call option Sellers, sell the shares of the underlying asset trying to decrease the price and the Put writers Buy the underlying stocks in order to increase the price. The Max Pain lies somewhere in the middle of the Most amount of Calls & Puts written. It changes with time but it mainly lies somewhere in the middle.
A large part of Option are bought OTM (Out of The Money) and most of them expire worthlessly or become (Zero). Max Pain is the Strike price that is the most Painful for Option buyers as they will lose most of the Premiums if the underlying asset expires in that particular Strike Price.
How to Calculate the Max Pain-
Calculating Max Pain is a complex and lengthy process but it can be found out from the following method-
- Find out the difference between the Asset Price & the Strike price for the particular Stock/ Index.
- Multiple the result of the Difference to the Open interest of that Strike Price.
- Multiple the difference of the Strike price and Stock price with the Open interest for both the Call option & Put option of the same Strike Price.
- Repeat this process for each of the Strike prices separately.
- After repeating this process for all the strike prices possible find out the Strike price with the highest value. That price is The Max pain price or the Max Pain Strike Price.
Example-
If Nifty is currently trading at 14900 and the 15000 & 15050 Call & Put option have the highest amount of open Interest put together, then that Strike Price might be considered as the Max Pain Option.
This diagram shows the Max Pain of Nifty-
In this, the 15000 Strike Price has the highest amount of open interest hence is the Max Pain. If Nifty expires at 15000, then the Option buyers will have to face the maximum amount of losses and the Option Writers or Sellers will benefit the most as the premiums will decay of the options of the farther strike prices leading them to make profits.