Option Max Pain Theory – How to use it for maximum gains?

What is “max pain” in options trading?

Options Max Pain Theory suggests, “On option expiration day, the underlying stock price often moves toward a point that brings maximum loss to option buyers.”

It’s a well-known fact that most options trading volume is made up of hedged positions from large institutions. Hedge funds, prop funds, FII’s, DII’s, pension funds – they all hedge their large positions using options and make up most options trading volume.

Since these institutions have so much money on the line, it makes sense for them to try to manipulate (move) markets to their advantage – if they can.

How would they do this?

Well, what if it turns out that if the Index closed at a certain price on expiry day, hedge funds/institutions would stand to benefit tremendously – doesn’t it make sense that hedge funds will try to move the Index in order to maximize their gain (and maximize your loss/pain)?

Understanding Max Pain:

So we know that the theory stems from the idea that large institutions will attempt to move the Underlying to a certain price in order to maximize their profits.

The natural next question, is, what price do they move it to, and why? In order to get to that, you need to understand an important fact.

Most Options Buyers Lose Money

Mostly due to a concept known as time decay, most options buyers lose money. It doesn’t matter whether you’re buying a call option or a put option – due to time decay, you’re probably going to lose money. In India, around 90% of Options buyers don’t make money.

Since we have established that institutions are writing (selling) options, they’re profiting – but in order to maximize your pain, they want you to lose the maximum amount of money.

In the Money, At the Money, and Out of the Money Options

In order for an Option buyer to profit, the option needs to expire ITM (in the money). If the option expires At the Money or Out of the Money, the Options buyer will not profit.

Since institutions want you (the Options buyer) to lose money, they want to minimize the number of options contracts that are In the Money.

Therefore, they are looking to maximize the number of contracts that are ATM and OTM.

So, order to get to Max Pain, institutions will move the underlying towards a strike price wherein they can get the maximum number of contracts (measured through Open Interest) that do not expire ITM.

How to use Options Max Pain Calculator Excel Sheet:

1) Download and save the file in your machine.

2) Open the Excel file, if there is any request for “Enable Editing” or “Enable Content”, Click that and provide access as described in the video.

3) To calculate max pain, move to Data tab at the top and click refresh.

4) Whenever you need current data, click refresh.

5) Refresh needs to be done separately for Nifty & BankNifty Data by keeping that particular sheet opened.

Link to Download MaxPain Calculator: 

https://drive.google.com/open?id=1z02Xt8Xq887Ok2CY9RNwgoLw35zBB7ZY

Watch our YouTube videos at https://www.youtube.com/c/MarketSecrets to learn how to trade options & how to use Max Pain data to take positions.

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