Max Pain Options Strategy: Guide To Maximum Pain Levels

The Max Pain is the price, which the maximum number of options contracts expire. Learn how to use the strategy with an example, process, pros and cons.

Option trading is already quite complex, and concepts such as Max Pain make it even more complex. But you know, understanding of these concepts helps you in making a profit and limiting losses.

In this Beirman Capital blog, we will have a look at Max Pain Options concepts, how to calculate them, with the advantages and disadvantages. It will help you in trading options efficiently and effectively.

What is Max Pain in Trading?

The Max Pain is the price, which the maximum number of options contracts expire. It is the strike price that the maximum potential losses for the option buyers and profits for the option sellers.

The Max Pain price can be defined as the level at which the stock can result in losses on most options at expiration. The name max pain is used because maximum option buyers tend to suffer losses until expiry during such scenarios. Also, options sellers tend to make money at this stage.

The max pain theory is based on the hypothesis that the price ot the asset tends to move towards the maximum strike price. And at times, most option contracts become worthless at expiry.

Max Pain Price Example

You may have heard of max pain, such as SPY or SPY max pain, GME Max Pain. These terms highlight the maximum pain price of these stocks or indices. Similarly, every option stoch has a max pain point.

Let’s look at an example for a better understanding

Suppose a stock was trending at $100, the strike prices for call and put options were $60 and $140, which means these are the max pain levels of the stock, where the most option contract holders lose money.

How to Use Max Pain Point

Now you know what the max pain point is, let’s learn the step-by-step process of how to use the strategy for option trading:

Calculate Max Point:

The first step to use the max pain point is to determine the max point values. You can do so by using the max pain calculator, and for manually calculating, follow the steps below:

Calculate the Difference between the stock price and the strike price
Multiply the difference by the open interest at the strike
Add dollar value for the put and call at that strike, and repeat for each strike.
The highest value strike price is your main pain price

Watch the Prices:

Keep an eye on the asset chart. When a contract heads towards the expiry date, the price tends to move towards max pain. Price moving towards max pain indicates options sellers are influencing the prices.

Use Indicators for Confirmation:

Max pain is not a sole sufficient tool to adjust or enter a trade position. So, traders should use technical analysis indicators such as support and resistance, trend lines and patterns to make informed decisions.

Develop your Trading Strategy:

If you feel that the stock price will move towards the max pain, the options buyers consider a hedging position, offsetting the losses, while option sellers wait for expiry to reap profit.

Have a Solid Risk Management and Adjust Your Position:

A max pain point changes frequently, so keep an eye on it and make changes in your trade position accordingly. Also, always trade with a stop loss and the right risk-to-reward ratio to manage the losses.

Benefits of Max Pain Point

Easy Tracking: Max pain calculation is complex. However, traders can use max pain calculators or even analyze max pain charts for easy calculation.

Informed Decision Making: When on the expiry date option approaches, Max pain point traders, traders can make buying or selling strategies accordingly.

Managing Positions: When using max pain points, if you identify potential for losses, you can hedge the risk by opening the opposite position. So, that either the position remains neutral or the expected losses will be reduced.

Limitations of Max Point

False Signals: Max point theory is not always accurate. Sometimes it gives wrong interpretations. In such cases, you may end up making a wrong decision.

Limited Scope: The strategy is only applicable in the options market. Generally, it is used for stock option trading. So it has limited scope, and traders who trade in diverse assets cannot use it.

Wrapping Up

Max pain is a must-to-know concept for option stock market traders. Whether you place a trade or not, it helps you in making informed trade decisions, adjusting positions and managing trade outcomes.

Also, the concept is quite complex, so traders may struggle using it. However, proper knowledge and practice will help you in using it efficiently.

Options can be complex and not suitable for beginners. If you are a beginner, you can try CFD trading, a more efficient and flexible way to trade diverse assets. Open an account with us to get started on your CFD trading journey.

FAQ

1. What does max pain indicate?

The max pain is the strike price that the maximum potential losses for the option buyers and profits for the option sellers.

2. What is the max pain figure?

The Max Pain is the price, which the maximum number of options contracts expire.

3. Why is it called max pain?

The name max pain is used because maximum option buyers tend to suffer losses until expiry during such a scenario, and most contracts become worthless.

4. What is the max pain in options stocks?

The Max Pain is the stock price at which the maximum number of options contracts expire.

5. What is max pain on expiry day?

Max pain is the price at which the most option traders lose money when their contracts expire. It’s based on the idea that most people holding options until the end won’t make a profit if the price ends up at this level.