Max Pain Theory for Options Expiry: A Nifty Worked Example and Why It Fails

Every Tuesday, somebody in a trading group posts a single number and calls it the level Nifty “has to” close at. Usually it’s the max pain strike. Max pain theory says that on options expiry, the index tends to drift towards the strike where option buyers, as a group, lose the most money and option writers lose the least. It’s a neat idea and the arithmetic is easy. The trouble is that it’s sold with far more confidence than it deserves. Below we work out a max pain level by hand on a made-up Nifty option chain, then go through the reasons it so often misses. If calls, puts and open interest are still new to you, our options trading for beginners in India guide covers the basics first.

Educational content only. Not investment advice. Every strike, open interest figure and rupee amount in the worked examples is hypothetical and picked to keep the arithmetic simple.

Max pain theory on options expiry: the basic idea

Start with what an option is worth on the last day. A call pays only if the index settles above its strike; a put pays only if it settles below. Everything else expires worthless, and whatever premium the buyer paid stays with the writer.

Now picture all the open contracts across every strike at once. For any closing level you choose, some writers will owe money and others won’t. Max pain is simply the closing level at which the writers, calls and puts added together, owe the least. Flip it around and that same level is where buyers collect the least.

Zerodha Varsity’s chapter on max pain and the put-call ratio traces the theory back to 2004 and says it knows of no academic papers on it. Varsity also spells out the belief the theory rests on: the popular claim that most options expire worthless, so writers make money more consistently than buyers. From there the chain runs like this. If writers usually win, prices on expiry day should get pushed to wherever writers lose the least, which means somebody is able to push them, and that somebody must be the writers.

Read that chain slowly. Each step assumes the one before it is true, and none of them is proven. Keep that in mind for the rest of this piece.

How to calculate max pain, step by step

Varsity lays out the method in five steps, and we’ll follow it exactly:

1. List the strikes and note the open interest (OI) for calls and for puts at each one.
2. Pick one strike and assume the index expires right there.
3. Work out how much call writers and put writers would lose at that closing level.
4. Add the two losses together.
5. Repeat for every strike. The strike with the smallest total loss is the max pain level.

Writer losses come from options that finish in the money. If the index closes at E, a call writer at strike K loses (E minus K) for every unit of OI whenever E is above K. A put writer at strike K loses (K minus E) for every unit whenever E is below K. Out-of-the-money options cost writers nothing at expiry.

A worked example on a small Nifty chain

Real Nifty chains have dozens of strikes, so we’ll shrink it to five, 100 points apart. To keep lot sizes out of the way, the OI below is already in units of the index (contracts multiplied by the lot size), in thousands. Treat these as invented numbers, nothing more.

Take one closing level properly, say 24,900. Only the 24,800 call is in the money, by 100 points, so call writers lose 100 × 10 = 1,000 (thousand rupees). On the put side, the 25,000, 25,100 and 25,200 puts are all in the money. Put writers lose (100 × 50) + (200 × 25) + (300 × 15) = 5,000 + 5,000 + 4,500 = 14,500. The total is 15,500 thousand, or ₹1.55 crore.

Do the same at each strike and you get this:

The smallest total, 9,500 thousand (₹95 lakh), sits at 25,000. So 25,000 is the max pain strike for this chain. Notice why. It’s the strike where heavy call OI above and heavy put OI below meet. Move the close 100 points either way and one side of the writer book starts bleeding fast.

Max pain tells you where open interest is piled up today. It doesn’t tell you where the index will be on Tuesday afternoon.

Now watch the number move

Here’s the part the WhatsApp forwards skip. OI changes every session. Say that over the next few days fresh puts get written at 25,000 and 25,100, while some call writers at 25,000 cover their positions. The chain now looks like this:

Run the same five steps again. The totals come to 50,000 at 24,800, 28,500 at 24,900, 15,000 at 25,000, 13,000 at 25,100 and 23,500 at 25,200 (all in ₹ ‘000). Max pain has shifted up 100 points to 25,100, and nothing happened to the index for that to occur. Traders simply repositioned.

That’s the central weakness. Max pain follows positioning. If you treat it as a forecast, you’re really betting that the positions in place today will still be in place, and still matter, at the close on expiry day.

Varsity’s author describes exactly this problem from their own trading. The OI changed daily, so the max pain level suggested on one date could be quite different ten days later. Their workaround was to fix one day, about 15 days before expiry, to run the calculation, and then treat the result as a rough range rather than a target.

Why max pain often fails

We’ve already seen the first reason: the number keeps moving. There are several more, and they matter just as much.

• Writers aren’t one team. The theory treats option sellers as a single group with a shared goal. In reality the writer side includes hedgers, arbitrage desks, market makers and retail sellers, often with opposite views and very different position sizes.
• Many writers are hedged. A desk that sold calls and bought futures against them doesn’t care much where the index settles. Its exposure isn’t the bare short option the calculation assumes.
• News beats positioning. A surprise in global markets, an RBI announcement or a big result from an index heavyweight can move Nifty well past any OI cluster within minutes. Positioning can’t stop that, and on volatile days it can even speed the move up as writers rush to cover.
• Index options are hard to pin. Moving a 50-stock index on purpose takes a lot of capital, much more than pushing a thinly traded single stock. That’s one more reason to be wary of the “writers steer the close” story.
• Weekly expiries crowd the calendar. NSE’s Nifty 50 derivatives page lists four weekly expiries alongside monthly, quarterly and half-yearly contracts. Weekly options expire every Tuesday of the expiry week and monthlies on the last Tuesday of the month, moving to the previous trading day if that Tuesday is a holiday. With several expiries open at once, each with its own max pain level, it isn’t obvious which one should “pull” the index.

None of this means the clustering is fake. Big OI walls do get defended for a while, and on quiet expiry days the index can sit near them. The mistake is believing the pull is strong enough to trade blindly.

Using max pain sensibly

If you still want max pain on your screen, and plenty of traders do, use it as background. A few ways that actually hold up:

• Read it alongside the OI walls. Max pain usually sits between the strike with the largest call OI and the strike with the largest put OI. Those two walls tell you more about where writers feel exposed than the single midpoint does.
• Pair it with the put-call ratio. Varsity covers PCR in the same chapter for a reason. Max pain hints at a level and PCR hints at sentiment. Our guide to put-call ratio trading on Nifty explains how to read the second one.
• Think in ranges, not points. Varsity’s author found better results by widening the computed level with a buffer and planning around a range. Their 5% buffer turned a 7,800 level into roughly 8,200 back in 2016. You don’t have to copy that number, but the instinct is right.
• Check how far away it is. A max pain level 50 points from spot on expiry morning means very little. One 600 points away with a day to go isn’t a forecast at all. It just shows that positions were built when the index was somewhere else.
• Respect time decay. Strategies built around a max pain level usually involve selling options, and selling options is mostly a bet on time decay. Our explainer on theta decay in options trading shows how quickly that works for writers in the last few sessions, and how badly it can turn on a gap.

If a max pain trade only works when the index behaves, it’s really a short-volatility trade with a story attached.

A quick reality check before any expiry trade

Before you build a position around max pain, ask yourself four plain questions. Is the level stable, or has it jumped around over the last few sessions? Is there scheduled news before expiry, such as a policy meeting, a major result or a global data release? If the index runs 1% past my level, what do I lose, and can I take it? And would I still place this trade if nobody had mentioned max pain at all?

If that last answer is no, the number is doing your thinking for you. That’s when it gets expensive.

Common mistakes with max pain

• Treating it as a prediction. It’s a snapshot of current positioning. Even Varsity’s walkthrough ends up treating it as a starting point for a range.
• Using stale data. A level worked out on Monday morning can be out of date by Tuesday’s open.
• Selling naked options on the back of it. A short call or put without a hedge can lose far more than the premium collected. Defined-risk structures exist for a reason.
• Ignoring which expiry you’re looking at. Weekly and monthly contracts have separate OI and separate max pain levels.
• Forgetting costs. Brokerage, statutory charges and bid-ask spreads eat a real share of small expiry-day gains.

Key takeaways

• Max pain is the expiry level at which option writers, calls and puts combined, would lose the least money, and buyers would collect the least.
• You get it by assuming expiry at each strike, adding up call and put writer losses, and picking the strike with the smallest total.
• The level moves whenever open interest moves, which is every session.
• The theory assumes writers act together and can steer the close. Neither holds up well for a broad index like Nifty.
• Use it as context next to OI walls, PCR and your own risk limits, never as a target to trade on its own.

Disclaimer: This article is for information and education only and is not investment advice or a recommendation to buy or sell any security or derivative. Options trading involves substantial risk and isn’t suitable for every investor. Consult a SEBI-registered investment adviser before making investment decisions.