Max pain, also known as the price for gme max pain is the strike price for the most options contracts that are open (i.e., puts and calls) and represents the amount at which the security would cause financial losses to the most number of owners of options upon the time of expiration.
The term”max pain” comes from the maxima pain theory which says that the majority of traders who purchase and keep Options agreements until expiration be unable to recover their investment.
Understanding Max Pain
According to the theory of maximum pain according to the maximum pain theory, prices of the the underlying stock is likely to move toward the “maximum price of pain price”–the value at which the largest amount of options (in dollars) will expire without value.
Maximum pain theory suggests that option writers hedge their contracts that they’ve written. For those who are the market maker hedge, it is to keep the stock neutral within the stock. Examine the market maker’s position when they have to create an option contract, but not wanting to hold an investment within the company.
As time for option expiration nears and the expiration date is near, option writers will attempt to sell or buy shares of stock to push prices towards an close price that makes sense to them or even in order to reduce their payments to option holders. For example call writers would like the price of shares to fall, while put writers would prefer to see shares prices increase.
Around 60 percent of options sold, 30 percent of options expire in vain and 10 percent of the options executed. The point at which the maximum pain occurs is at which the owners of options (buyers) are in “maximum pain,” or are at risk of losing the most amount of money. Option sellers however might earn the highest profits.
The theory of maximum pain is not without controversy. The critics of the theory are divided over whether the tendency of the underlying price of the stock to be a trough toward the price of maximum pain is simply a luck or the market manipulative.
The calculation of how to calculate the Max Pain Point
The gme Max Pain is straightforward but lengthy calculation that takes a long time to. It is basically the total that is the put value and the value of the call for each money strike.
Each put or call, the in-the-money strike price, both calls and puts:
- Find out the difference between the price of the stock and strike price
- Multiply the results by open interest at the strike.
- Add the value in dollars for the call and put at the time of strike.
- Repetition for every strike
- Find the most expensive strike price. This is the equivalent of the price of pain at its maximum.
Since the maximum pain price can fluctuate daily and even from hour to hour and vice versa, using it as trading tool isn’t straightforward. But, it can be useful to know if there is a huge variation between the current price and the price at which the maximum pain is. There may be a tendency to cause the price to increase closer to maximum pain, however the effect might not be noticeable until expiration is near. 1
Exemple of Max Pain
For instance, suppose options of the stock ABC are being traded at a strike price of $48. However, there is substantial interest in ABC options that have strikes of between $51 and $52. The maximum price will end up at one of these prices since they allow the most number of ABC’s options expire in vain.gme max pain