Max pain is one of the most quoted numbers around expiry. Option chains and social media posts display it, and some traders treat it as a forecast of where the index will settle.
This article explains what max pain is, shows how it is calculated with a small worked example, sets out the theory behind it, and explains why it is a much weaker guide than its popularity suggests.
What max pain is
Max pain is the expiry price at which the total value of all outstanding options for an expiry would be lowest — in other words, the price at which option buyers as a group would receive the least, and option sellers as a group would pay out the least.
It is calculated from open interest across all strikes for both call options and put options. For each possible settlement price, you work out how much every in-the-money option would be worth, add them up, and find the price where that total is smallest.
The name comes from the idea that this is the price that causes maximum pain to option buyers.
It is a calculation from published data, not an official figure from the exchange, and different websites can show slightly different values depending on when they last updated open interest.
A worked example
Take a simplified chain with three strikes and open interest in lots:
23,900: call option OI 100, put option OI 600.
24,000: call option OI 300, put option OI 400.
24,100: call option OI 500, put option OI 100.
Now test each strike as the settlement price.
Settlement at 23,900: no call options are in the money. Put options at 24,000 are 100 points in the money × 400 = 40,000; put options at 24,100 are 200 points × 100 = 20,000. Total: 60,000.
Settlement at 24,000: call options at 23,900 are 100 points × 100 = 10,000. Put options at 24,100 are 100 points × 100 = 10,000. Total: 20,000.
Settlement at 24,100: call options at 23,900 are 200 × 100 = 20,000; at 24,000, 100 × 300 = 30,000. No put options in the money. Total: 50,000.
The lowest total is at 24,000, so 24,000 is the answer in this example. Real chains have dozens of strikes, so the calculation is done by software, but the logic is identical.
The theory behind it
The argument behind the theory goes like this: option sellers are often large, well-capitalised participants, and they hedge their positions in the underlying. As expiry approaches, their hedging activity, and possibly deliberate trading, tends to push the price towards the level where their payouts are smallest.
A related, more defensible observation is about hedging flows near large open interest. When very large positions exist at particular strikes, the hedging of those positions by market makers can, at times, have a stabilising effect on the price near those strikes close to expiry. This is sometimes described as pinning.
Supporters point to expiries where the index settled close to the calculated level as confirmation.
Why it is unreliable
Open interest does not show who holds what. The calculation assumes buyers are on one side and sellers on the other in a simple way. In reality, many positions are parts of spreads, hedges against shares or futures, or arbitrage. The same open interest can represent very different exposures.
It moves. Open interest changes through the expiry week and during the final day. The figure calculated on Monday can be far from the one calculated by Thursday, and many quoted figures are stale.
The underlying is driven by much more. Index levels respond to global markets, flows, news and the trading of the underlying shares themselves. Option open interest is one input among many.
Confirmation bias. Expiries that settle near max pain are remembered and shared; those that settle far away are forgotten. Without a careful count over many expiries, the impression of accuracy is misleading.
Large moves ignore it. In trending or volatile weeks, the index can move hundreds of points away from that level regardless of open interest.
The pinning effect near very large open interest is real at times, but it is a tendency on some expiries, not a forecast.
How to use it, if at all
As context, not a signal. Knowing where large open interest sits is useful for understanding where hedging activity may be concentrated. This calculation is one way of summarising that.
Only close to expiry. Any relevance it has is concentrated in the final day or two, and it should be recalculated with fresh data.
Never as a sole reason to sell options. Selling a straddle at the max pain strike on the assumption the price will settle there leaves a position exposed to exactly the kind of sharp move the theory ignores.
Check it against your own records. If you want to rely on it, track over many expiries how far the actual settlement was from the level calculated a day earlier. The result will show how much weight it deserves.
A simple test you can run. For the next twenty expiries, note the calculated level on the morning of the day before expiry and the actual settlement price. Record the gap in points each time. Then compare that gap with how far the index typically moves in a single day. If the gaps are similar to an ordinary day's range, the calculation is adding little that a plain guess of “close to today's level” would not. Most traders who keep such a record find the number far less impressive than the posts about it suggest, and they learn to treat it as background information rather than a target.
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Figures in the example are illustrative. This is educational material, not advice, and no position is recommended. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Derivatives can lose more than the amount blocked against them.
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Frequently Asked Questions
What is max pain in options?
The expiry price at which the total value of outstanding options would be lowest, calculated from open interest across all strikes for call options and put options.
How is max pain calculated?
For each possible settlement price, add up the intrinsic value of every in-the-money option weighted by open interest, and find the price where the total is smallest.
Does the index settle at max pain?
Sometimes it settles nearby, but often it does not. Open interest changes, positions are hedged in complex ways, and large moves ignore it.
Can I trade based on max pain?
Using it as the sole reason to sell options is risky. At most it is context close to expiry, recalculated with fresh data.
Is the pinning effect real?
Hedging around very large open interest can at times stabilise the price near those strikes close to expiry, but it is an occasional tendency, not a reliable forecast.
Related Reading
- In, at and out of the money explained
- A defined-upside credit structure
- Reading open interest on the chain
- Volume versus open interest
- When positions pile up at one strike
- How expiry day actually behaves
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
