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Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks by W. Edward Olmstead - Professor of Applied Mathematics McCormick School of Engineering and Applied Sciences Northwestern University

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Chapter 28. Theory of Maximum Pain[*]

[*] Chapters with more advanced content are marked with an asterisk and can be passed over by beginners during the first reading of this book.

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 ...

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