How it is calculated
For each strike, imagine the index settles exactly there at expiry. Work out what every open call and put would be worth at that price (only in-the-money options have value) and add it up, weighting by open interest. The strike where that total is smallest is max pain — the price at which option buyers together would receive the least, and option writers would keep the most premium.
The idea behind it
The max pain theory says the price tends to drift towards this strike near expiry, because option writers hold large positions. It is a popular reference on expiry days.
Why it is only a rough guide
- Max pain moves as open interest changes during the day and the week.
- Big news, global markets and index heavyweights move the price far more than option positions do.
- In practice, the index often settles well away from max pain.
Use it as one number alongside open interest and the PCR, not as a target.