Max Pain Options: What is Max Pain? Max Pain tells us options will tend to expire where losses to options buyers are maximum. Or, where CALL and PUT sellers combined loss is least options should expire there.
Max Pain combined with chart analysis will certainly help you find where market options can expire. If you would master this, then your will be able to make better trading decisions.
Always remember Max Pain works for highly liquid stocks with high open interest. Therefore, instead of Bank Nifty, you should be using it for Nifty. And in case of stocks, always go with bluechip.
If the pain is moving downside and CALLs are increasing, then it means market has good resistance at those levels and it may not hold the levels. Max Pain should be ideally checked every 1H interval.
On the contrary, if it is moving upside, it means options sellers are selling more PUTs and there is support building and market will hold the levels.
Before you add max pain to your analysis, remember it must be used as secondary option because like other indicators, it is a lagging indicator which shows you what had happened, not what will happen.
Pro Tip: If you find market has broken a strong support or resistance and max pain also has moved to that direction then it means market is really moving in that direction and OI is indeed build there.
It also helps you know whether there is any fake breakout. Meaning if you find that market has broken a support/resistance level, but MAX is still not moved then you should wait for confirmation.
Weekly expiry Max Pain is more reliable than monthly because it changes every moment. Therefore, monitor weekly max pain to identify the trend and potential expiry levels.