What is max pain in options, and how is it calculated?

Max pain is a number you will see quoted in almost every options discussion in India. It is simple to calculate, and it is just as easy to misuse. This guide explains what it means, how to work it out by hand and how far you should trust it.

The idea in one sentence

Max pain is the expiry price at which the total amount paid out to option buyers is the smallest. Put another way, it is the strike where option writers (sellers) as a group would pay out the least, and buyers as a group would lose the most.

How it is calculated

Take one expiry. For every strike, you know how many contracts of open interest (OI) there are in calls and in puts. Then, for each strike you could imagine the index closing at, you add up what every option would be worth at that close.

• A call with a strike below the closing price is worth the difference. A call at or above the closing price is worth nothing.
• A put with a strike above the closing price is worth the difference. A put at or below the closing price is worth nothing.
• Multiply each difference by that strike's open interest, and add up all the calls and puts. That total is the "pain" for that closing price.

The strike with the smallest total is max pain. Tradingraph does exactly this on the open interest in NSE's end-of-day F&O file, for each index.

A small example

Suppose only three strikes exist: 100, 200 and 300. Calls have OI of 10, 20 and 30 contracts. Puts have OI of 30, 20 and 10 contracts, in the same order.

• If the market closes at 100: calls are all worth zero. The 200 and 300 puts are worth 100 and 200 each, so the total is 20 × 100 + 10 × 200 = 4,000.
• If it closes at 200: the 100 calls are worth 100 each (1,000). The 300 puts are worth 100 each (1,000). Total 2,000.
• If it closes at 300: the 100 and 200 calls are worth 200 and 100 each (2,000 + 2,000). Puts are worth nothing. Total 4,000.

The lowest total is at 200, so max pain is 200.

Why traders talk about it

The argument is that large option writers have a financial interest in the market settling where they pay out least, and that prices drift toward max pain as expiry approaches. You will hear this called "pinning".

Why you should be careful with it

• It is a description of where open interest sits today, not a forecast. The number moves every day as positions are opened and closed.
• Open interest does not tell you who holds the position. A large put open interest may be hedges, not speculation, and a writer can hold a futures position that offsets the option.
• Markets settle away from max pain all the time, especially when there is news.
• The calculation uses open interest at the close of the previous session, so it can be stale by the time you read it.

A better use is as one reference level among several: compare it with the highest call and put open interest strikes, and with pivot levels.

This page is for information and education only and is not trading advice.