Max Pain Theory

Max Pain Theory is an options market concept that suggests the price of the underlying asset will tend to gravitate toward the strike price at which the maximum number of options contracts—both calls and puts—expire worthless, causing the greatest financial loss to the largest number of option buyers. This strike price is known as the Max Pain point or maximum pain price. The theory is based on the observation that options sellers (writers) tend to be institutional players with an incentive to see options expire worthless. While not a precise forecasting tool, traders monitor the Max Pain level for Nifty and Bank Nifty weekly and monthly expiries as one input into their near-expiry directional and positional strategy.