Suppose Nifty is trading at 8000.

For Simplicity’s sake, I assume only three strike prices are there for the Nifty Options which are 7900, 8000, 8100. And here goes the Open Interest of Put Options and Call Options of the said strike price.

Open interest is the total number of open or outstanding (not closed or delivered) derivatives (options and futures) that exist on a given day. If A buys 1 lot of option contract and B sells 1 lot of option contract; then the Open Interest increases by 1

StrikePut OICall OI
79001110975322950
80003114525966225
81002259900570975

For Novice,

  • Buying NIFTY FEB 7900 PE means You’re betting on the underlying asset, Nifty will stay down 7900 at the time of expiry of the contract in February end.
  • Buying NIFTY FEB 7900 CE means You’re betting on the underlying asset, Nifty will stay above 7900 at the time of expiry of the contract in February end. .

So, Selling NIFTY FEB 7900 PE = Buying NIFTY FEB 7900 CE in terms of concept. But Selling NIFTY FEB 7900 PE will have more probability of profit due to time decay. That’s another story.

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.”

The theory has tons of pros and cons. You can read more here – Option Strategy: Max Pain Theory

However, let’s see how to find that point here because unless you manually calculate the point at least once, there is no way you can take advantage of this theory.

Max Pain is the strike the price at which the option buyer loses the maximum amount of money. But we will calculate the price where option sellers loses the minimum. Hence it’s the same point!

We must look at each strike and see how much Net Profit or Loss will be there if the underlying asset closes at that strike price. Then we choose the strike price that gives us the minimum loss.

Let’s calculate on our hypothetical Nifty.

Case 1: Nifty closes at 7900 at the time of expiry

  • NIFTY 7900 PE i.e Put Options of NIFTY with strike price of 7900 is worthless.
  • NIFTY 8000 PE and NIFTY 8100 PE are in the money.

Since the derivatives move proportionately with the underlying asset. We can get an intrinsic value of 7900 PE, 8000 PE and 8100 PE which we can use as a price difference instead of using assumptive hypothetical prices. (As we don’t know the real price at the time of expiry.)

  • 8000 PE will have intrinsic value of (8000–7900) = 100
  • 8100 PE will have intrinsic value of (8100–7900) = 200
Asset PriceStrike PriceIntristicPut OITotal Put ValueIntristicCall OITotal Call Value
7634325000
7900790001110975003229500
79008000100311452531145250009662250
79008100200225990045198000005709750

So the cash value of all the options at 7900 strike price is Total Put Value + Total Call Value = 763432500 + 0 = 763432500

Case 2: Nifty closes at 8000 at the time of expiry

Asset PriceStrike PriceIntristicPut OITotal Put ValueIntristicCall OITotal Call Value
22599000032295000
8000790001110975010032295032295000
8000800003114525009662250
80008100100225990022599000005709750

So the cash value of all the options at 8000 strike price is Total Put Value + Total Call Value = 32295000 + 225990000 = 258285000

Case 3: Nifty closes at 8100 at the time of expiry

Asset PriceStrike PriceIntristicPut OITotal Put ValueIntristicCall OITotal Call Value
0161212500
8100790001110975020032295064590000
8100800003114525010096622596622500
8100810002259900005709750

So the cash value of all the options at 8100 strike price is Total Put Value + Total Call Value = 0 + 161212500 = 161212500

What the Maximum Pain Strike Price here?

In this table, we see combined cash value paid out by the option writers at each strike price.

StrikePut OICall OICall valuePut valueTotal
790011109753229500763432500763432500
8000311452596622532295000225990000258285000
810022599005709751612125000161212500

8100 is the maximum pain strike price here as you can see from the ‘Total’ column of 8100 strike price causes minimum loss to the option writers.

So according to the theory,

  • you can take any put positions as all of them will expire worthless.
  • You can also sell call options of 8100 strike price as both call and put options will expire for 8100 strike price.

I had the entire Maximum Pain Strike Price of Nifty calculated in an excel sheet by hand. See my results of max pain in this post along with notes on optimizing the strategy.

Asset PriceStrike PriceIntristicPut OITotal Put ValueIntristicCall OITotal Call Value
183825900000
7900790001110975003229500
79008000100311452531145250009662250
79008100200225990045198000005709750
7900820030033910501017315000011852250
7900830040035737501429500000010737750
7900840050046098752304937500011898750
7900850060053052753183165000016813500
7900860070044754753132832500022061250
7900870080033189002655120000030624750
790088009001066575959917500044985750
790089001000619650619650000038316750
79009000110015425251696777500061867500
790091001200334950401940000028280250
79009200130090750117975000021330000
790093001400381005334000008882250
790094001500311254668750004533000

However, if you do the calculation with tons of strike price, you will see like this above table.