# Max Pain in Options: Calculation Method and Examples

![Max Pain](https://www.investopedia.com/thmb/FPqxduJ9WD9knARzhXYwKMc9J1M=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Maxpain-Final-b0add5252f0340159819f960a52295c8.jpg)

*— Investopedia / Michela Buttignol*

> **Definition**
>
> As an options contract nears expiration, the strike price that would cause the maximum amount of pain for the highest possible number of options traders is said to be the maximum pain point.

## What Is Max Pain?

Max pain, also known as the max pain price, is a strike price in options trading where the largest number of options [expire](https://www.investopedia.com/terms/e/expirationdate.asp) worthless, causing the greatest loss for option holders. This concept stems from the maximum pain hypothesis, suggesting that the price of the underlying stock gravitates towards this point as option expiration approaches. Understanding max pain helps traders anticipate potential market movements.

### Key Takeaways

*   Max pain refers to the price at which the greatest number of options contracts will expire worthless, maximizing financial loss for option holders.
*   The Max Pain hypothesis suggests that an underlying stock's price may gravitate toward the max pain price as options near expiry.
*   Calculating max pain involves summing the dollar values of both in-the-money put and call options at every strike price.
*   Approximately 30% of options expire worthless, while 60% are traded before expiration, and 10% are exercised.
*   The maximum pain hypothesis is controversial and debated as either market manipulation or a natural occurrence.

## How Max Pain Influences Option Trading

According to the maximum pain hypothesis, the price of an [underlying](https://www.investopedia.com/terms/u/underlying.asp) stock tends to gravitate towards its "maximum pain strike price"—the price where the greatest number of options (in dollar value) will expire worthless.

The maximum pain hypothesis states that option writers [hedge](https://www.investopedia.com/terms/h/hedge.asp) their contracts. In the case of the [market maker](https://www.investopedia.com/terms/m/marketmaker.asp), the hedging is done to remain neutral in the stock. Consider the market maker's position if they must write an option contract without wanting a position in the stock.

As the [option](https://www.investopedia.com/terms/o/option.asp) expiration approaches, option writers will try to buy or sell shares of stock to drive the price toward a [closing price](https://www.investopedia.com/terms/c/closingprice.asp) that is profitable for them, or at least to hedge their payouts to option holders. For instance, call writers will want the share price to go down while put writers would like to see share prices go up.

Around 60% of options are traded, 30% expire worthless, and 10% are [exercised](https://www.investopedia.com/terms/e/exercise.asp). Max pain is where buyers lose the most money, while sellers may benefit the most.

The maximum pain hypothesis is controversial. Critics debate if a stock's move towards the max pain price is random or [manipulated](https://www.investopedia.com/terms/m/manipulation.asp).

## Step-by-Step Calculation of the Max Pain Point

Max pain is a simple but time consuming calculation. Essentially, it is the sum of the outstanding put and call dollar value of each in-the-money [strike price](https://www.investopedia.com/terms/s/strikeprice.asp).

For each [in-the-money](https://www.investopedia.com/terms/i/inthemoney.asp) strike price for both puts and calls:

1.  Find the difference between stock price and strike price
2.  Multiply the result by open interest at that strike
3.  Add together the dollar value for the put and call at that strike
4.  Repeat for each strike price
5.  Find the highest value strike price. This price is equivalent to max pain price.

Because the max pain price can change daily, if not from hour to hour, using it as a trading tool is not easy. However, it is sometimes valuable to note when there is a large difference between the current stock price and the max pain price. There could be a tendency for the [stock](https://www.investopedia.com/terms/s/stock.asp) to move closer to max pain, but the effects may not be meaningful until expiration approaches.

## Practical Example of Max Pain in Action

For example, _s_uppose options of stock ABC are trading at a strike price on $48. However, there is significant open interest on ABC options at strike prices of $51 and $52. Then the max pain price will settle at either one of these two values because they will cause the maximum number of ABC's options to expire worthless.

## How Accurate is Maximum Pain?

The maximum pain hypothesis is not infallible. It can give options traders an idea of how the market perceives the price at which underlying options are likely to expire worthless, but it only assumes normal market conditions.

## Why Do Market Makers Want Option Premiums to Expire Worthless?

When the option price expires worthless, the market maker can keep the premium. This is they make money in the options market.

## Do Most Options Expire Worthless?

About 30% of options will expire worthless. About 60% are traded before expiry and about 10% are exercised.

## The Bottom Line

Max pain refers to the strike price where the greatest number of options—both puts and calls—expire worthless, causing significant financial loss to holders. This concept is rooted in the maximum pain hypothesis, which suggests that as expiration nears, stock prices tend to move towards this max pain point due to actions by option writers and market makers. Though over 60% of options are traded or exercised before expiry, about 30% expire worthless. Using max pain as a trading tool requires careful timing as it fluctuates, but recognizing and understanding its potential market influence offers traders valuable insight.

> **Article Sources**
>
> 1.  SoFi. "[What Is Max Pain in Options Trading?](https://www.sofi.com/learn/content/max-pain-options/)"