Identify strike prices where option holders experience maximum financial loss at expiration
Max Pain is the strike price at which option holders (both calls and puts) would experience the maximum financial loss at expiration. It represents where option writers would profit most if the underlying closes at that price.
Some traders believe stocks tend to gravitate toward max pain as expiration approaches, due to market makers hedging their positions. Monitoring max pain can help identify potential support/resistance levels near expiration.
The Max Pain theory suggests that stocks tend to be pinned near the strike price that causes maximum loss for option buyers. This happens because market makers, who are typically net sellers of options, may hedge their positions by buying or selling the underlying stock to push prices toward max pain.
Call OI Impact
High call OI above current price may create resistance
Put OI Impact
High put OI below current price may create support
Expiration Week
Effect is often strongest during expiration week