If you are familiar with options, and you feel that large institutions are manipulating stock prices, then you might consider taking advantage of the max pain theory. The max pain theory claims that as options expiration approaches, the stock price will tend to get pushed toward the price at which the greatest number of options (in terms of rupee value) will expire worthlessly. In other words, the theory holds that when expiration approaches, stock or index price will gravitate toward the price that will cause both call and put buyers the most “pain”, since their options would expire worthless at that “max pain” price. Thus, max pain is the price at which option buyers would loss the most money, and option writers (sellers) would profit the most. This page will have the Options Max Pain Calculator for Nifty and Bank Nifty.
Max Pain generally going to be the strike price with the greatest number of open contracts. Max pain is only a theory and can’t be relied on to work all of the time. However, the max pain theory is supported by the fact that there are very large institutional sellers who may have the ability to manipulate stock prices. Thus, it is possible that they will push a stock price toward the max pain point, so that their option writing trades will benefit the most. When expiration is near and a stock price gravitates toward the max pain price, some people will say that it is being “pegged” or “pinned”. It is difficult to prove whether max pain “pinning” is real or coincidental, but stock and option trades can still benefit from being aware of max pain, especially when option expiration dates are near. The trader can have an idea of where the expiry is likely to take place from our Options Max Pain Calculator.
The image above shows that the Max Pain for the Nifty index is at 9600, the lowest point of the curve.
If you want to test the theory out (which you should not do with large amounts of money – it’s best to paper trade any theory first) you can make a directional bet with small amounts of stocks or options. The idea is to bet that the stock price when there is only a short time left until option expiration, will tend to move toward the max pain price. Some traders swear by this method, but you will want to do your own research before trying anything out for yourself. So, the next time you see the price of Nifty or Bank Nifty “magically” or “magnetically” moving toward a round number in the final hour before options expiration, you can understand that this is the power of Options Max Pain.