Max pain is the strike at which, if the market expired exactly there, the holders of all open calls and puts together would lose the most money (and option writers would gain the most).
How it is calculated
For each strike we imagine expiry at that price, add up what every open call and put would be worth at that price (using open interest), and pick the strike where that total is smallest.
How to use it
- Some traders believe prices drift towards max pain near expiry, because large writers defend their positions. The evidence for this is mixed.
- Max pain moves as open interest changes, so it is more meaningful on expiry week and late in the day.
- Use it with PCR and the OI by strike, never on its own.