What is Max Pain in options?

Max Pain/Max Pain Price is the strike price with maximum open put and call options contracts and the price at which would cause losses for the largest number of option buyers at expiration.

Also known as the Options Pain, the Max Pain Theory suggests that by the option expiration day, the price of the underlying stock often moves towards a point that creates maximum loss to option buyers. It assumes that 85-90% of all options contracts expire worthlessly and hence writers/sellers tend to make money more often than buyers.

The rationale behind this is that as the expiration of an options contract approaches, options writers/sellers try to buy or sell the underlying stock to drive the price towards a price that is profitable to them, or to hedge their payouts to the option holders. In other words, call writers/sellers sell the underlying stock to drive its price down and put writers/sellers buy the underlying stock in an attempt to drive the price up. At the centre of this is the max pain strike price which creates maximum loss/pain for option buyers (and hence minimum loss/pain for option writers/sellers).

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