Every trader want to know expiry level of Nifty and Bank Nifty on expiry date. But only few traders are able to know these levels. ISFM – Best Stock Market Training Institute has discovered Max Pain Theory to know index closing levels on expiry.

What is Max Pain ?

Max Pain Trading Strategy Is a Technique Of Options Trading Which Predict The Strike Price At Which Contract Is Going To Expire. The Concept of Max Pain Is Use to Predict The expiry Of Contract, Option Buyers Who Hold Their Contracts Until Expiration Will Experience The Maximum Pain, Which Is When Their Options Expire without Having Any Value.

The Max Pain Strike Price Is Derived From The Option Strike Price Having Maximum No Of Open Interest Of Put And Call Options.

The Max-Pain Theory

To Understand The Concept Of Max-Pain Theory, Let’s Suppose A Big Player Sells A Call And Put Option Of 18000 strike price.

If index Price Rises Above The Strike Of 18000, The Big Player Will Sell Contracts To Push The Price Back Towards The Strike Of 18000, And If The Stock Price Falls Below 18000, The Big Players will buy Contracts To Push The Price Back Toward 18000 Strike Price.

By Doing This The Big Players Are Trying Their Best That Both the call And Put Options Expire Worthless, And Make Sure That They Keep the Premiums Collected When They Write the Options.

How To Calculate Max Pain ?

1. Find-Out ITM Strike Prices:
We Must Identify the ITM Strike Prices for a Particular Contract’s Put and Call Options. The ITM Options Are Those With Intrinsic Value.

2.Calculate The Difference Between the Underlying Price And Each ITM strike prices:
Now, We Must Calculate The Difference Between The Underlying Price And The Strike Price For Each ITM Strike Prices.

3. Multiply Result With (O.I) Open Interest:
After Getting Differences for Each ITM Strike Prices, We Will Multiply Each Difference By The OI Of That Strike Price. OI Is The Number Of Current Outstanding Contracts.

4. Add The Results:
Now Sum up the Results Obtained in step 3 For All ITM Strike Prices To Get The Total Outstanding Value Of Puts And Call Options.

5. Determine the Max-Pain Strike/Level:
Strike Price with Maximum value of Outstanding Put and call Is Considered as the Max Pain Strike/Level. It’s The Strike-price At Which Option Sellers Will Try to Retain/Hold Price Till Expiry to Make Sure Their Options Expire
Worthless.

6. Calculating Max-pain manually can Be Complicated And Time Consuming Process, Specially In Case Of Stocks with Multiple Strike Prices Option Contracts. That’s why Most of Traders uses Automated Software to Find out Max pain Level/Strike.