Are you 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 options max pain theory claims that as options expiration approaches, the stock price will tend to move toward a price. This price is where the greatest number of options (in terms of rupee value) that 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.
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. Options Max Pain calculates outstanding open interest at any point of time and calculates max pain. The theory suggests that before expiration the underlying stock moves to a point where there is a maximum loss to option buyers. Before reaching a conclusion it presumes the following. Buyers of option lose money mostly. Sellers are the institutional players or hedge funds who hedge their position by selling options. Sellers are big players who can induce the underlying to move to a point where the option buyers lose money mostly creating maximum pain for the option buyers.
Nifty Options Max Pain (Live)
Bank Nifty Options Max Pain (Live)
Sometimes the above charts do not work. So we are also providing an excel file to calculate the options max pain data for Nifty and Bank Nifty. We have seen that this theory holds true mostly. Options traders can gain using this theory as part of the fundamental analysis for the stock price to be at the time of expiry.
Max Pain generally going to be the strike price with the greatest number of open contracts. Max pain is only a theory and we can not rely on it 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. In that case, their option writing trades will benefit the most.
How to Trade this Theory?
- Options max pain theory calculates the outstanding open interest of PE (puts) and CE (calls) at any point of time at different strike prices.
- It is calculated for a particular expiry. This calculation will not be valid for other expiries.
- All open interest data are imported to an MS-Excel sheet for all the PEs and CEs at different strike price for particular expiry.
- The max pain is calculated at the strike price where the minimum net loss occurs to option sellers.
As seen from the Excel file above and graphical representation thereof, the Max Pain is at 9600. Here the combined open interest of PE and CE in minimum. That is Nifty is expected to expire at the strike price of 9600 where the option sellers’ loss is minimum.
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 page.
The image above shows that the Max Pain for the Nifty index is at 9600. That is the lowest point of the curve. So theoretically that is the point where the expiry is likely to take place.
Download Link Of The Option Max Pain Excel
The Option Max Pain Excel OR Option Max Pain calculator free can be downloaded below.
Strategy – We can strategically trade options using option max pain excel in the following ways.
- As Ratio Trade we can take a strategy by selling three lots of 9900 CE and 9300 PE each combining with the selling of one lot of 9800 CE and 9400 PE each.
- For a more aggressive strategy, in the last week of expiry, we can sell one lot ATM straddle of 9600 CE and PE and sell two lots of 9800 CE and 9400 PE.
- We can also adopt a strategy of selling one lot of CEs and PEs at different strike prices equidistant from option pain strike price. The strategy should be properly hedged.
If you want to test the theory out 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. The price 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.