I would like to tell that, Option Pain or Max Pain is a theory which states that Option Contracts will expire worthless which causes maximum loss to the traders who buy option contracts and hold till the expiry.
Here is how optionspain.com formally defines Option Pain – “In the options market, wealth transfer between option buyers and sellers is a zero sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the markets, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group”.
Step 2: For each Strike, assume that the derivative contract ends at that Strike on expiry.
Step 3: Calculate how much money is lost by the Option Writers/Sellers (both Call and Put Option)
Step 4: Add up the money lost by both Call and Put option sellers.
Step 5: Identify the Strike at which the money lost by Option Sellers is least.
It is the Strike price point at which most pain is witnessed by the Option Buyers and it is the price at which the derivative contract will expire.
**Disclaimer: All the risk must be borne by you before you implement or use the above method and all details discussed above are for educational purpose only.
Here is how optionspain.com formally defines Option Pain – “In the options market, wealth transfer between option buyers and sellers is a zero sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the markets, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group”.
Does MaxPain Theory Works?
I know you have this doubt since you started reading this post. Just go through the below to find the Options Maximum Pain levels which are calculated in real time with Live data for both Nifty and Bank Nifty current month expiry. You can also find a Max Pain Chart for both Nifty and BankNifty. The data is calculated real time with formulas as mentioned below.How to Calculate Option Pain?
Step 1: List down all the strikes of a derivative and note down its Call and Put Open Interest corresponding to each Strike.Step 2: For each Strike, assume that the derivative contract ends at that Strike on expiry.
Step 3: Calculate how much money is lost by the Option Writers/Sellers (both Call and Put Option)
Step 4: Add up the money lost by both Call and Put option sellers.
Step 5: Identify the Strike at which the money lost by Option Sellers is least.
It is the Strike price point at which most pain is witnessed by the Option Buyers and it is the price at which the derivative contract will expire.
Option Pain for Nifty Expiry
Option Pain for BankNifty Expiry
**Disclaimer: All the risk must be borne by you before you implement or use the above method and all details discussed above are for educational purpose only.
