Today, I will be showing you how you can use Max Pain Options like a professional trader. If you could master this skill then you will be able to closely, not accurately, predict where market options can expire.
Before we jump in, remember you need to read max pain in options from options seller perspective. You will understand this from its definition up next.
This post is not going to be a technical jargon. Instead, you will how to add it to your trading strategy to increase your chances of booking profit. I am going to show you how I interpret max pain options to know what strikes I should sell or buy.
I am not an options buyer because like a beginners I too try hard to win huge money buy buying Out-of-the-Money options which eventually becomes zero instead of showing profits.
After few years, I learned options are not for buyers, these are meant for sellers. If I put it into very simple words then Options Buyers can consider themselves as lottery buyers who buy lottery tickets in hope of becoming rich. Out of 100, only 3-5 win lottery and rest just waste their money.
On the other hand, Options Sellers are the lottery seller houses who are going to win certainly in the long run. And these are the people who make real money.
Option buyer once in a month gets a super trade which helps him make good money. But rest of the month, he just waste double the money he earned in hope of catching the trend again.
Don’t take lightly the words mentioned above. If you could understand the depth then you will certainly become a good trader.
What is Max Pain?
It simply shows us where the most options contracts are open. And according to max pain options theory, 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.
You need to understand that it is not easy to understand max pain because it keeps changing according the market situation.
Max Pain Options: Understand and Start Using Like A Pro Trader
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.
First of all, always choose highly liquid stocks or indices for studying max pain.
Here are best ways I use to read max pain options along with my technical analysis.
Rule 1: Chart is always first. Once you analyze chart and support potential trend, next you can study max pain to verify options positions which eventually shows you where the options sellers are trying to expire the market.
If max pain is moving downside and CALL OI is increasing (which means sellers are making positions), then it tells you that market has good resistance at those levels and it may not hold the levels.
Max Pain should be ideally checked every 1H interval.
If above is true then you too can sell CALLs or buy Puts. But before that you must spot a breakdown on chart.
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.
In case above is true then you can sell PUT or buy CALL options after spotting a breakout on the chart.
As I mentioned repeatedly, before you add max pain to your analysis, remember it must be used as a secondary option because like other indicators, it is a lagging indicator which shows you what had happened, not what will happen.
Here is a Pro tip for you: 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.
Max pain options also help you know whether there is any fake breakout.
Example, if you find that market has broken a support/resistance level, but max pain is still not moved then you should wait for confirmation.
Finally, 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.
This website has free Risk Reward calculator which shows you right position sizing so you can learn money management perfectly which is most important thing to do in trading.