Wednesday, December 7, 2016
Joined Jan 1, 1970
1,010 Blog Posts

Options Maximum Pain

Maximum Pain is one of those lovely/wacky theories out there in options-land:  unproven, anecdotal, sometimes true & awe/fear/anger-inspiring.  It’s essentially a big ‘FUCK YOU‘ to the option-buying public from the Market Makers/assumed option sellers/hedgers.  Yes, the market is indeed out to get you.  Depending on your mindset, that may strike a cord…

The theory mostly stems from the general assumption/old-wives’-tale that [make up a percentage, say 80%] of all options expire worthless on Expiration Friday (like today).  While this is patently untrue (the vast majority of options are traded, rather than held, well before expiration), the idea/myth/legend remains.

And sure, no doubt there’s something to it.  Afterall, most options are sold by the BIG BOYS who leverage them against vast quantities of underlying stock…so, theoretically, if they wanted to truly manipulate the market, they could sell/buy the underlying as needed.  As net sellers of options, they would definitely have vested interest in seeing as many of those expire worthless as possible.

It’s at that this point that we have Max Pain for the little guy.  It can be found by calculating the total dollar value of all open contracts (based on open interest vs. strike price).  Whichever strike gives the LOWEST total value (held by the options buyers) is the point of Max Pain.  At this point, the sellers maximize their gain, while the buyers/suckers maximize their pain.

Easy-peasy.  Luckily, you don’t have to calculate this by hand…the internet is your friend & valuable resource!  Optionistics has an excellent online calculator/grapher, although they call it the “Strike Pegger” (the price to which the underlying will get pegged in order to cause Max Pain).

Even if this sounds a little too far fetched for you, it’s something that you might want to keep in mind as you head into this year’s last (& triple witching) options expiration Friday.  So let’s take a look at a few high (options) volume names and see how close we get to the predicted “pegs.”

SPY – Max Pain:  108. (with a positive bias)
Change needed to hit peg:  -2%


QQQQ – Max Pain:  43 (with a negative bias)
Change needed to hit peg:  -1.87%


C – Max Pain:  4. (with a negative bias)
Change needed to hit peg:  25%


AAPL – Max Pain:  195. (with a negative bias)
Change needed to hit peg:  1.64%


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  1. MX2101

    The option market makers (big boys, locals, whatever) are going to get paid, and they do this every day. They are not going to be there unless they are making money.

    An occasional retail trader trying to outsmart them is like someone who buys a car once every three years trying to out-negotiate a car salesman who does this every day.

    I think the odds over time are not in the favor of a single long position trader. The little guy has to make some good directional bets and manage risk and money very well to have a chance in the long only option game.

    I don’t think this view is a negative mindset, but rather a sober assessment of reality

  2. Yogi & Boo Boo

    I agree.

  3. TA

    There’s nothing anecdotal or unproven about it.

    Market makers need to take the opposite side of trades(via options) to hedge themselves so things naturally get pinned to a strike. It’s the only way they can do their job. There’s some very good explanations on the Internet about it if you do a quick search.

    • dpeezy

      The anecdotal/unproven part was referring to (or at least trying to refer to) the idea of Max Pain – aka. pinning to the one and only strike which is the most beneficial to the sellers.

      Pinning action happens all the time on expiration, but not necessarily at those specific pegs. Like today…

      • Mr. Cain Thaler

        In calculation, the pin probably acts more within the functioning of probable gains, as a sort of mean value, determined across the entire space of options, so if you add in the magnitude of gains, it’s possible that this graph (essentially a simple parabola) could take on more advanced polynomial shapes with various local inflection points.

        Also, this theory seems to assume that all options are amassed to a single agglomerate, from which the Max Pain minimum is defined. While this is acceptable from the position of the options trader (the thought process is similar to Green’s Theorem or other such processes that attempt to discuss the change outside a body by only what is seen entering or exiting it, as a whole), it’s worth pointing out that within the mass there exists competition that can create unpredictability.

        From the stance of set theory, just because the mass has energy it can utilize against the options market doesn’t mean that it will. It’s a complex problem with many single solutions (think sinks or wells) where you can’t presume that all behavior between the two can be analyzed independently.

        Actually, this creates an interesting possibility, since an individual with a keen mind could probably learn to recognize under what conditions Max Pain theory applies, and under which it is a faulty assumption. I bet you could benefit extensively from such research, if you took on options risk where the ability of the market makers to attain the Max Pain point was in question.

        I’ve heard that options markets are open sets with lots of “black pool” areas that make calculations and reasoning tricky. What are your thoughts on this, DPeezy?

        • dpeezy

          In short, yes.

          We have a very limited view of what’s actually happening and thus the theory is based on a very limited set of assumptions. In fact, this applies to every-day options, too, since metrics such as volume or even open interest can be open to interpretation (not to mention the discrepancies in reporting that can occur between various sources). It’s part of what makes options such a “dark art” and unappealing to a majority of traders (the other, bigger part, is the perceived complexity of trading options).

          One of the better and more readily available ways to potentially improve the theory is to look at activity only from the last 30 days (so roughly since the previous expiration). The idea being that selling such short term options are more likely to be opened purely for manipulation/protection/etc.

          This doesn’t really cure any of the flaws of the theory, but it does give varying results from the “full” pain calculation. For example, the SPY Max Pain would jump up to 111, from 108.

          (*Proponents of the theory would at this point out that even though we didn’t hit 111, we moved in the “right direction” today, that is towards the Max Pain strike.)

          And just to mention one of the bigger flaws…the theory assumes that all open contracts (“open interest”) have a buyer associated with them, who is “long” the option. However, both “buy to open” and “sell to open” are reported as open interest…yet only the former fits the assumption. More importantly, the “manipulators,” just like any other Joe Schmoe, have no way of knowing what sort of trade the individual contracts are involved in…and thus a major source of error is introduced into the calculation when it’s assumed that all opens are long.

          • Mr. Cain Thaler

            It would perhaps be a far more simple approach to identify several key players in a single name and then wait patiently for their interests to be opposed to one another.

            Sticking with the mathematica speak, that would be the equivilant to a single solution within the boundary of those players, such that the entire Max Pain theory is broken assunder and the odds of purchasing an option that carries through to expiration is considerably better than what is perceived.

            • dpeezy

              Yes, but it’s much more fun to speculate about a vast options “max pain” conspiracy out there! 🙂

              This is one of those things that when it doesn’t work, you just chalk it up to “crazy talk” and the inane babbling of the conspiracy theorists. But on the rare occasions when it does accurately pinpoint the peg, you get to cry foul & “I told you so!” & “Illuminati” & etc…