What is Max Pain?

Max pain is an options market concept used to estimate the strike price where option buyers would lose the most money and option sellers would lose the least at expiry. It is calculated from the open interest (the number of outstanding call and put contracts) across different strike prices. Traders calculate the potential losses for option buyers at across strikes to find where the aggregate loss would be the biggest. This strike price is called max pain.

If the market closes at this level, many call and put options expire worthless, meaning buyers lose their premiums and sellers keep it. Think of max pain as the price where the most options expire with no value, causing the most ‘pain’ for buyers.

However, max pain is not a price target or a prediction. It is just a snapshot based on current open interest and changes as positions shift. External factors like news flow, market momentum, or big institutional trades may easily overpower it. Thus, max pain may be used as context for risk and positioning, but not as a guarantee of where prices may go.

Table of contents

• How is the max pain calculated?
• Here is the step-by-step method to determine the max pain:
• Example showing the calculation of max pain
• Advantages of Max Pain
• Disadvantages of Max Pain

How is the max pain calculated?

At expiry, only in-the-money (ITM) options pay anything to their holders. An option is ITM if exercising it is profitable––for example, a call option is ITM when the market price is above its strike price, and a put option is ITM when the market price is below its strike. Options that are not ITM expire worthless.

The idea behind max pain is simple: if you calculate how much option writers (sellers) would have to pay buyers across all strikes for both calls and puts at a given settlement price, you get the total payout for that price. It represents the point where option buyers, in aggregate, lose the most and sellers lose the least.

Also Read: What is stock trading?

Here is the step-by-step method to determine the max pain:

1. Collect the open interest for each strike on both the call and put sides.
2. Pick a candidate settlement price, usually each strike in the chain.
3. For every call strike K, compute payoff per contract as max (0, Settlement − K). For every put strike K, compute max (0, K − Settlement).
4. Multiply each payoff by its open interest, then sum across all strikes for calls and for puts.
5. Add call and put sums to get the total payout at that settlement.
6. Repeat for the next candidate settlement.
7. The settlement with the smallest total is the max pain.

Lot size multiplies every payoff by the same constant, so it does not change which settlement produces the minimum. You do not need implied volatility, greeks (risk measures), or intraday prices to compute it only the open interest distribution and a clear routine.

Example showing the calculation of max pain

Assume an index with three strikes: 100, 101, and 102.

• Call open interest: 100 at 100, 150 at 101, 100 at 102.
• Put open interest: 120 at 100, 100 at 101, 80 at 102.

Case 1: Settlement at 101

• Calls in-the-money: Only the 100-strike call. Payoff = (101 − 100) × 100 = 100.
• Puts in-the-money: 102 - strike put = (102 − 101) × 80 = 80.
• Total payout = 100 + 80 = 180.

Case 2: Settlement at 102

• Calls in-the-money: 100-strike = (102 − 100) × 100 = 200.
  101-strike = (102 − 101) × 150 = 150.
  Call sum = 350.
• Puts in-the-money: None, because settlement is at the top strike.
• Total payout = 350.

Comparing settlements, the total payout is smaller at 101 (180) than at 102 (350). That makes 101 the max pain level.

Advantages of Max Pain

• Offers a quick snapshot of where option writers may stand to potentially benefit most.
• Helps traders guess the price level the market might move toward on expiry day when there isn’t any big news or strong trend affecting it.
• Uses only open interest data, so calculation is simple and transparent.
• Provides useful context for managing expiry-day risk and positioning.

Disadvantages of Max Pain

• Not a prediction—spot prices may easily move away from max due to news, flows, or momentum.
• Shifts intraday as open interest changes, reducing reliability.
• Ignores volatility, sentiment, and broader market drivers.
• May mislead if treated as a price target instead of a reference point.

Also Read: How to invest in the share market in 2025

Conclusion

Max pain tells you where option payouts would be lowest if expiry happened now with the current open interest. That information may give a useful context for expiry-day expectations, intraday hedging, and understanding where dealer flows might flatten out. But it does not forecast news, it does not override strong trends, and it does not guarantee a close near that level. Investors may aim to use it alongside price, volume, skew, and key intraday levels. If you trade around max pain, it is advised to do so with defined risk and a plan for when price ignores it.

FAQs

What is the concept of max pain?

Max pain is the strike where the combined payout to option buyers across calls and puts would be smallest at expiry. It is computed by summing theoretical payouts using the current open interest and selecting the settlement that minimises that sum.

What is max pain Bank Nifty?

It is the same calculation applied to Bank Nifty options. You aggregate open interest across Bank Nifty call and put strikes and identify the strike where the total expiry-time payout would be lowest. Traders then watch whether spot gravitates toward that strike on expiry.

What are the limitations of max pain?

It depends on open interest that changes through the day, so the level moves. It ignores intraday momentum, news, and large hedging flows that can overpower. It also assumes that option writers’ incentives translate into price action, which may potentially fail during strong trends or volatile events.

Is max pain a good indicator?

It is a decent secondary reference on expiry days but a poor standalone signal. It may be used to frame risk, size hedges, or avoid fighting a potential pin late in the session. It is advised to validate it with price action, order flow, and positioning, rather than taking trades solely because the max pain level is close.

What is the max pain in stock options?

It is the options strike price at which option buyers (both calls and puts) would lose the most money at expiration, and option writers (sellers) would gain the most. It is the strike that minimises the total payout to all option buyers at expiry for a given stock’s option chain. You calculate it by testing each strike as the settlement, summing call and put payouts weighted by open interest, and picking the lowest total.

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