Max Pain

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Definition of 'Max Pain'

Max pain is the price at which the options market makers would suffer the maximum losses. It is the strike price at which the number of puts and calls in the market are equal. The options market makers try to keep the market at max pain to minimize their losses.

Max pain is calculated by taking the weighted average of the strike prices of all the puts and calls in the market. The weights are determined by the number of contracts at each strike price.

Max pain is an important concept for option traders to understand because it can help them to identify potential trading opportunities. For example, if the market is at max pain, it may be a good time to sell options because the market makers are likely to be willing to pay more for options at that price.

However, it is important to note that max pain is not always accurate. The market makers may not always be able to keep the market at max pain, and there may be other factors that affect the price of options.

Nevertheless, max pain is a useful tool for option traders to use in their analysis. It can help them to identify potential trading opportunities and to make better decisions about when to buy and sell options.

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