What is Max Pain in Options?

Max Pain is an options-market concept that identifies the strike price at which the combined intrinsic value of outstanding call and put options would be lowest at expiry. In other words, 

• Max pain is the price at which option writers have the lowest total payout to option buyers at expiry. 

This calculation is generally based on the open interest at different strike prices. Furthermore, the max pain options theory NSE is based on the assumption that option writers would have the lowest total payout if the underlying price expires at the max pain level. 

At this price, option buyers collectively receive the least intrinsic value. However, max pain is not a prediction of where the underlying will expire.

How to Calculate Max Pain in Options?

To calculate max pain, the open interest for calls and puts across available strike prices is required. For each possible expiry price, you may:

1. Calculate the intrinsic value of every outstanding call.
2. Calculate the intrinsic value of every outstanding put.
3. Multiply each option’s intrinsic value by its open interest.
4. Add the total call and put values.
5. Repeat the calculation for each strike.
6. The strike producing the lowest combined option value is identified as the max-pain strike.

Note: Max pain can change as traders add or close positions, so it is not a fixed level throughout the life of an options contract.

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