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What is Options Max pain Strategy?
What is Option Max Pain?
It is always seen that 90%+ options expire out of the money. Since most options buyers lose money in options trading, the price of the underlying stock somehow must be adjusted / manipulated to close in a way that benefits option writers at the time of options expiry. This is basis for Option max pain point where the loss incurred by options buyers is also termed as “Options Pain”.
How does Options Max Pain work?
On option expiration day, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This is how the Option Max Pain work.
Options Traders can utilize this concept to their advantage. Option writing can be done near expiry based on this theory, provided other technical indicators also favor the trade. No trade should be taken without extensive study (of technicals or fundamentals of the underlying).
Nifty trader website gives a free page for max pain below
Let us examine, how we can use it
So what does above chart say to us
- Option Writer are active on Call side
- Max pain point is 17400
How can we use this to our advantage?
we have in above chart option writer are active on CAll side betting that price wont go up. Now check PCR Ratio if its less than 1 actually take 0.90 as reference to be sure for indication of bearishness(please read below for more on PCR Ratio)
Now we can also take a position of option writing on 17500 CE or above likee 17600 CE betting that price wont go up with a Stop loss of 30% on Fridays to Tuesdays and 50% on Wednesday and Thursdays. Theta (time) decay is on our side.
How to monitor above for change in direction?
Keep noticing the PCR Ratio’s and Option MAX pain point for adjustments.
What is PCR?
PCR is calculated by taking the put options Open Interest (from the Option Chain table) and divide by the Open Interest of calls. This data is easily available in option chain NSE Website for Nifty or Banknifty or other site like Niftytrader.
Ways to interpret ‘Put Call Ratio’ and Nifty or BankNifty Spot Correlation:
- If the PCR (Put Call Ratio) is increasing during correction in the up trending market – this is very bullish indication. It means, the Put writers are aggressively writing at dips. Look for retracement percentage of last rise during correction while keeping an eye on this chart.
- If the PCR is steadily rising during the day along with Nifty spot – it is considered bullish.
- If PCR is declining while the Nifty spot is near resistance level – it is a bearish indication. This implies that bulls are fearful of bears.
- If PCR declines during correction in the down trending market – this is very bearish indication. It means, either call writers are aggressively writing at every rise or Put writers are closing there positions cutting losses. Look for retracement percentage of last fall during correction while keeping an eye on this chart.
Always remember one Golden Rule for PCR:
“If PCR ratio stays below the previous day closing PCR, then market is likely to be bearish and I look for short trade setups. If the PCR ratio stays above the previous day closing PCR then I search for long trade patterns only”
This article is for educational purposes only and please do your own back testing before using.