Live Nifty Options Open Interest Monitoring Tool
- Thread starter santhosh2010
- Start date
What is the “MaxPain Theory” in options?
This is again a theory based on the fact that option buyers are retail traders who typically always buy options whereas option writers/sellers are professional/institutions who have a higher chance of winning, and typically the professionals/institutions will have a higher chance of making profits.According to this theory the underlying (Nifty in the above example) on the expiry day will gravitate towards that point at which option buyers will feel the maximum pain, basically a point where the maximum number of options, both calls and puts value could become zero (worthless) on the expiry day. To calculate this we need the open interest of both calls and puts for various strike prices(Nifty in this example) and use a correct formula to calculate the MaxPain point.
Though the theory sounds like a conspiracy, if you look historically maxpain has proved to be a leading indicator predicting a fall/rise in the markets provided you have considered only the relevant strike prices.
Once you have a formula to calculate Maxpain there are 3 ways in which you can use it for trading, assume Nifty is presently 7770 and Maxpain is showing 7700.
a. You can setup strategies assuming that Nifty will go towards 7700.
b. You can use this for position management, which means that if Nifty is below the Maxpain, take larger buy positions than short positions, because we are generally expecting Nifty to go up. Similarly if Nifty is above the Maxpain, take bigger short positions than long ones as you expect the market to come lower towards the Maxpain.
c. Keep tracking Maxpain and anytime there is a big move, either up or down, use it as a buy or sell signal respectively.
This is again a theory based on the fact that option buyers are retail traders who typically always buy options whereas option writers/sellers are professional/institutions who have a higher chance of winning, and typically the professionals/institutions will have a higher chance of making profits.According to this theory the underlying (Nifty in the above example) on the expiry day will gravitate towards that point at which option buyers will feel the maximum pain, basically a point where the maximum number of options, both calls and puts value could become zero (worthless) on the expiry day. To calculate this we need the open interest of both calls and puts for various strike prices(Nifty in this example) and use a correct formula to calculate the MaxPain point.
Though the theory sounds like a conspiracy, if you look historically maxpain has proved to be a leading indicator predicting a fall/rise in the markets provided you have considered only the relevant strike prices.
Once you have a formula to calculate Maxpain there are 3 ways in which you can use it for trading, assume Nifty is presently 7770 and Maxpain is showing 7700.
a. You can setup strategies assuming that Nifty will go towards 7700.
b. You can use this for position management, which means that if Nifty is below the Maxpain, take larger buy positions than short positions, because we are generally expecting Nifty to go up. Similarly if Nifty is above the Maxpain, take bigger short positions than long ones as you expect the market to come lower towards the Maxpain.
c. Keep tracking Maxpain and anytime there is a big move, either up or down, use it as a buy or sell signal respectively.
Its working fine ...
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