Max Pain Calculator & Pin Risk

How the Max Pain Calculator Works

Max pain is the strike price at which the total dollar value paid out to all option holders (calls and puts combined) at expiration is smallest — in other words, the price that costs option buyers, in aggregate, the most money. For every candidate expiration price, the calculator sums (price − call strike) × call open interest × 100 for every call strike below that price, plus (put strike − price) × put open interest × 100 for every put strike above it. The candidate price with the lowest total is max pain.

Example: suppose open interest is concentrated at three strikes: $95 calls (1,000 contracts) and puts (200 contracts), $100 calls (500) and puts (500), and $105 calls (200) and puts (1,000). At an expiration price of $95, the payout is $12,500,000 (all from the $100 and $105 puts). At $105, it's also $12,500,000 (all from the $95 and $100 calls). At $100, the payout is only $10,000,000 — the $95 calls owe $5,000,000 and the $105 puts owe $5,000,000, but the $100 strike itself owes nothing. $100 is the max pain price in this example, because it's where the deepest open interest sits.

Max pain theory holds that market makers, who are net short most of the open interest, have a financial incentive to hedge the underlying toward the max pain price into expiration — though this effect competes with the stock's real supply and demand and is strongest only in the final day or two before expiry.