28*. Theory of Maximum Pain

A lot of mystery surrounds the theory of maximum pain. This theory, more familiarly known as max pain or strike price pegging, attempts to explain the curious price movement of a stock (or index) that is sometimes observed during the last few days leading up to an option’s expiration date.

Briefly, max pain refers to the situation in which the price of a stock seems to lock in on an option strike price as expiration nears. During the last few days, the stock price will vacillate around the strike price as if tethered by an elastic cord. The targeted strike price is typically the one that has the largest amount of open interest in the about-to-expire options.

A variety of explanations have been offered for the max pain ...

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