Identify the "Pin Price" for option expiration. Max Pain theory suggests that market prices gravitate toward the strike where the largest number of option buyers lose money.
Max Pain is the strike price where the combined value of all Calls and Puts is lowest. On expiration day, stocks often gravitate toward this "Pain Point" because it results in the most profit for option sellers (Market Makers).
Bullish Sentiment (High Call OI)
The theory is based on Market Maker Incentives. When market makers sell (write) options to retail traders, they want to pay out as little as possible. By nudging the stock price toward the strike with the lowest total intrinsic value, they maximize their own profits and minimize payouts to option buyers.
Max pain is most accurate during Monthly Expirations (the 3rd Friday of every month) for high-volume stocks like AAPL, TSLA, and SPY. If a stock is trading far away from its Max Pain level on a Wednesday or Thursday, it often signals a potential "reversion to the mean" by Friday afternoon.
Pro Tip:
Use this calculator in conjunction with our Gamma Exposure (GEX) tool to see if the market is in a "Stable" or "Volatile" regime.
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