Max Pain Theory for Expiry Day
The strike at which the most option buyers lose — and exactly how much weight to give it.
- Lesson
- 24
- Advanced level
- Reading time
- 9 min
- 3 chapters
- Practice
- 4
- quiz questions and 5 FAQs
Picture a mela where a stall owner has promised prizes to many visitors. Each visitor holds a token that says, “pay me if the ball lands past this line”. The owner would love the ball to land where the fewest prizes must be paid. Max pain is that spot, worked out for option contracts: the expiry level at which the total payout to option buyers is the smallest.
It is a calculation, and the calculation is easy to check by hand. The debated part is the story built on top of it: that the index is drawn toward that level by option sellers. Some traders believe this. Others think it is a coincidence in the cases where it seems to work. This module keeps the two apart. First the arithmetic, then the theory, then the limits.
All numbers are round illustrations. Nothing here is a prediction or a recommendation.
How is max pain worked out?
First the words. An option buyer is paid at expiry only if the option is in the money. A call pays the index level minus its strike, if positive. A put pays its strike minus the index level, if positive. Index options settle in cash. So for any assumed expiry level, you can add up what all open options would pay out.
Illustration. Three strikes and open interest in lakh contracts. Calls open: 10 at 24,400, 20 at 24,500, 30 at 24,600. Puts open: 30 at 24,400, 20 at 24,500, 10 at 24,600. Try three expiry levels.
If NIFTY expires at 24,400: no call pays. The 24,500 puts pay 100 points on 20 lakh, which is 2,000. The 24,600 puts pay 200 on 10 lakh, which is 2,000. Total 4,000. If NIFTY expires at 24,500: the 24,400 calls pay 100 × 10 = 1,000 and the 24,600 puts pay 100 × 10 = 1,000. Total 2,000. If NIFTY expires at 24,600: the 24,400 calls pay 200 × 10 = 2,000 and the 24,500 calls pay 100 × 20 = 2,000. Total 4,000.
The smallest total is 2,000, at 24,500. So 24,500 is the max pain strike. Real chains have dozens of strikes, so the sum is done by software, but the idea is exactly this. Note that the answer changes whenever open interest changes, which is every day.
Max pain, worked out by hand
Illustration: three strikes, open interest in lakh contracts. Payout is in points × lakh.
Total payout at an assumed expiry level S
Try each strike as S. The S with the lowest payout is the max pain strike.
SAssumed final index level at expiryKStrike price of an optionOIOpen interest (contracts open) at that strike
Why do some traders believe the index is drawn to max pain?
The claim rests on an assumption: that the sellers are one group with one goal, and that they can move the index. The chain does not show this. Buyers and sellers both include hedgers, spread traders and arbitrageurs. A seller of a call might hold the underlying shares. A buyer of a put might hold a portfolio. The chain shows the sum of open contracts. It does not show the portfolios behind them.
The other side of the argument is simple. The index is moved by the whole market, including large orders, global news and index-linked flows. On a day of news it can go through the max pain level with no pause. On a quiet day it can close there. Closing near max pain on a quiet day does not prove the theory, since a quiet index is near its mid-range anyway.
Whether the effect exists, how large it is and in which conditions are questions this module does not claim to settle. If you see published figures for how often the index closed near max pain, check who calculated them, over what period and with what definition, before you rely on them. Needs verification from a primary source.
Step by step
- 01
The claim
Option sellers, often large firms, would gain most if the index expires at max pain, because buyers would collect least.
- 02
The mechanism proposed
Sellers hedge their positions by trading the index or futures. Near expiry this hedging could nudge the index toward strikes with heavy open interest, an effect called pinning.
- 03
Where it may be plausible
When one strike holds very large open interest and expiry is close, hedging flows can be large relative to normal trading.
- 04
Where it may not hold
Hedges are not visible. Sellers may hold offsetting positions elsewhere, such as in futures or in other expiries, so the chain does not show their true exposure.
Warning
Do not treat max pain as a target price. It is the result of a calculation on open interest that changes every day.
Warning
Selling options because “max pain says the index will stay here” exposes you to losses that can be large. Sellers carry the risk of a move in either direction.
How can it be used with care, and where does it fail?
The safest use is as a reference. Note the max pain strike, note the strikes with the largest open interest, and treat them as places where the day’s trading may be busy. That is an observation, not a forecast.
It fails in several ways. A single large hedge or spread can move the calculation. Open interest changes daily, so the max pain strike can move by several strikes within a week. A gap on news can carry the index far from it. And after the calculation, costs such as brokerage, taxes and spreads still apply to whatever you do.
The takeaway: max pain tells you where option buyers, as a group, would collect the least at expiry. It does not tell you where the index will settle. Any plan that relies on it being right needs a limit on how much you can lose if it is wrong.
What it can show
Useful for
Where open interest is heavy, so the strikes many traders have positions inNot useful for
Nothing about who holds those positions or whyTime to look
Useful for
In the last days before expiry, when the numbers are large and stableNot useful for
Weeks before expiry, when open interest keeps changingAs a reference level
Useful for
One of several levels to note alongside price levelsNot useful for
A target or a reason to sell optionsWhen events are near
Useful for
Weight it lessNot useful for
Expect it to hold
Useful for compared with Not useful for. Rules are revised from time to time.
Key points
- Max pain is a calculation on open interest. It is not a forecast.
- It changes as open interest changes.
- The pinning story is debated. Do not treat it as settled.
- Use it, if at all, as one reference level, with a loss limit written down.
Common questions
It is the expiry level at which the total amount paid to all option buyers would be the smallest. It is worked out from open interest at every strike.
Knowledge Check
In the illustration, why is 24,500 the max pain strike?
Keep reading
- Module 21Decoding the Option ChainEvery column on the NSE option chain, and the order an experienced eye actually reads them in.
- Module 22Open Interest (OI) & The Four PhasesPrice alone tells you what happened. Price read against open interest tells you who is behind it.
- Module 25Anatomy of Expiry Day TradingWhat changes hour by hour in the final session, when gamma and theta both go vertical.
Written By
Rohit Singh
Mr. Chartist
With 14+ years of experience in Indian financial markets, Rohit Singh (Mr. Chartist) is a SEBI Registered Research Analyst, Amazon #1 bestselling author, and the founder of Investology — a premium trading ecosystem trusted by a 1.5 Lakh+ strong community across India.