Winning in options trading is very difficult, especially for the small traders who buy call or put options. In options trading, about 95% of the traders lose money. So there are only 5% traders who make huge money consistently.
Now, these 5% traders are the large institutions, HNI, FII, Proprietary traders who are selling/ writing options. Small traders can take advantage of option max pain theory and turn the tide in your favor.
While trading options make sure your trading cost is low, else you will struggle to break even.
What is Option Max Pain Theory?
As per max pain theory, as the time nears the options expiration. The deep pocket traders (large institutions, HNI, FII, Proprietary traders), they manipulate the stock prices in such a way that it expires at the max pain point.
So the max pain is the level at which the option writers/sellers will profit the most and option buyers will lose maximum.
[LIVE] Nifty Option Max Pain Chart:
Max Pain is basically the strike price which will cause the minimum value of the loss to option writers. Option Max pain is just a theory and we should not blindly following it to work all of the time, one should do their own analysis.
As per my experience index futures on the day of expiration is 99% of the time very close to the Max pain point. We can predict the expiration level to some extent using max pain.
As option sellers/ writers are such large traders, that using their capital they may manipulate the prices. Therefore they may push stock prices towards the max pain level so that they benefit the most and maximum options expire worthless.
Read Books on Option Trading.
On the expiration day, it is common to see the stock price moving closer to max pain level. It is still difficult to say if it happens because of max pain theory or just a coincidence.
But traders can take max pain level as an advantage for taking intraday positions on futures or option writing. Using our Options Max Pain chart traders can get an idea of a level, where there is a high probability of expiry.
If your broker is charging you more than Rs.20 per trade brokerage, then you need to open a trading account with us.