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.”
Options trading is a zero-sum game between Option Buyers and Sellers.
Max Pain theory is based on the assumption that “maximum number of Option “buyers” will lose money” at the time of expiry.
One of the theories for this assumption is – Most Option Sellers are large institutions that hedge the open positions of their portfolio. They have the ability to manipulate the index price to suit their open positions of Options.
It also assumes that at the expiration week, the index moves towards the strike price where the maximum loss occurs to the option buyer (or, minimum loss occurs to the option writer).
This is called Max Pain Strike Price. This strategy tells us the strike price at which the option contract is going to expire with a high probability.
The current Nifty Pain is 8600. You can find the daily pain. You do not need to calculate with complex excel stuff or refreshing an excel sheet with web queries. The hard task of max pain calculator is already done and live! Enjoy it.
The max pain theory can be optimized to a huge extent to ensure maximum profitability.
Then there is a weird set of mathematics comes into scalping as selling all of these are sort of safe trade. These are scalped in high volume in day trading based on technicals. If anything wrong happens, we carry forward.
That’s another story to tell. 🙂
To know the max pain strike price here is what we need to do –
|Strike||Put OI||Call OI||Call value||Put value||Total|
I had the Maximum Pain Strike Price of Nifty calculated in an excel sheet by hand. See my results of max pain above. You can see the minimum value of the Total Column belongs to the strike price of 8600.
If you want the entire calculation of max pain which I had, here it is. Please comment if you have any questions on this theory.