That level is called the Max Pain Point of the option. Of course, these options OI data is subject to constant change and hence needs to be calculated on a real time basis. Prima facie, this means that the option expiry for the Bank Nifty will converge towards the level of 26, Quite often, this number in isolation may not mean much but if you track the Max pain data real time, then you get a fairly good picture of whether the price at the time of expiry will trend down or up.
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This is not scientifically backed but it has surely been empirically tested. Can traders actually rely on the Max Pain theory? Broadly, it is true that option sellers have a better understanding and therefore better control over option prices compare to the retail traders who are essentially buyers of the options. That means you can take advantage of the max pain theory. The theory believes that as options expiration approaches, stock price will get pushed toward the price at which the greatest number of options in terms of rupee value will expire worthless.
What is Option Pain and how can it used in practice
In other words, the theory holds that when expiration approaches, stock or index price will gravitate toward the price that will cause maximum pain to both call and put buyers. In short, option pain is the point at which buyers lose the most and sellers gain the most. If you understand this concept, then even as an option buyer , you can profit from this knowledge.
How option buyers can profitably apply the Max Option Pain idea? The broad assumption with the Max Pain theory is that the expiry price will gravitate towards the price at which there is maximum pain for buyers of options. We are very interested to hear any feedback on these ideas. For more information, or to inquire about subscription options, please visit our website.
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Stock max pain calculator
However, it is sometimes valuable to note when there is a large difference between the current stock price and the max pain price. There could be a tendency for the stock to move closer to max pain, but the effects may not be meaningful until expiration approaches. Then the max pain price will settle at either one of these two values because they will cause the maximum number of ABC's options to expire worthless.
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Options Max Pain Theory Explained & How People Trade It
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What is Option Pain?
What Is Max Pain? Key Takeaways Max pain, or the max pain price, is the strike price with the most open contract puts and calls and the price at which the stock would cause financial losses for the largest number of option holders at expiration.
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The Maximum Pain theory states that an option's price will gravitate towards a max pain price, in some cases equal to the strike price for an option, that causes the maximum number of options to expire worthless. Max pain calculation involves the summation of the dollar values of outstanding put and call options for each in-the-money strike price. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.