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September 9, 2007

Strike of Pain Calculator

Filed under: Uncategorized — manoftoday @ 7:18 am

 

 

The Strike of Pain is the strike price with the lowest In-the-Money value for both calls and puts on a given stock for a given expiration date. The Strike of Pain calculation is based on the theory of Max-Pain(tm) developed by BCA Software.

Why is this important?
It is believed that stocks will have a tendency to gravitate to the Strike of Pain on expiration day. There is evidence that this tendency exists, but there is still debate on whether this is caused by market forces or by mere chance. It is important to note that such events such as market upheaval, price momentum, breaking news or extreme earnings reports will negate the Strike of Pain value. It is also important to note that the Strike of Pain price is more reliable within the last week until expiration. The Strike of Pain value for a 6-month out target month may be inaccurate as the open interest can drastically change between now and the 6-month expiration date.

How is the Strike of Pain calculated?
As mentioned above, the Strike of Pain is based of the theory of Max-Pain(tm) developed by BCA Software. This theory takes the value that an option is ITM if the stock was trading at a different strike. That value (for the calls or puts) is then multiplied by its open interest. This value for all ITM calls and puts is then added together. The strike that reflects the lowest ITM value is the Strike of Pain. Let’s look at a brief example:

XYZ is trading at $24.50.
We would then look at the Full Call and Put Chain for the nearest month that would show the Open Interest:

The Strike of Pain Calculator will quickly analyze the total ITM value at each strike price. For example, if the stock was trading at 17.5 all of the calls would be OTM. However, all of the put strikes (excluding the 17.5) would be ITM. The 20 strike put would be $2.50 ITM, the 22.5 put would be $5.00 ITM, the 25 put would be $7.50 ITM and so on. To determine the ITM Value of the 20-strike put if the stock was trading at $17.50 we would multiply the 20 put Open Interest, 23, times $2.50 (the amount the put is ITM). This step would be repeated for the rest of the ITM puts and then all the values would be added together.

If the stock was trading at $25, the 22.5 call would be $2.50 ITM, the 20 call would be $5.00 ITM, and the 17.5 call would be $7.50 ITM. Conversely, the 27.5 put would be $2.50 ITM and the 30 put would be $5.00 ITM. Again, the ITM values would by multiplied times the corresponding strikes Open Interest and the call and put ITM values would be added together.

The strike price with the lowest total ITM value is the Strike of Pain. This is the strike price that the stock may have a tendency to gravitate to at expiration.

Source: Strike of Pain Calculator – PowerOptions WeBlog

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5 Comments »

  1. where can i find the current pain calculators. There are a lot of site that show max pain, etc but I want information on all the options that are sold this month. Current pain calculators supposedly do that but I can t seem to find it anywhere on the net. any suggestions. Thanks
    fm

    Comment by faroq moonda — October 11, 2008 @ 9:19 pm

  2. the website http://www.optionpain.com has the current pain calculator at a subscription basis.

    Comment by mitjohn — August 26, 2009 @ 5:41 am

  3. http://maxpa.in is a good source for 100% free max pain calculations and options trading ideas. No e-mail requested, no spam, just the data…

    I track maximum pain for approximately 500-600 stocks each day, and values are available for just about any ticker symbol.

    Comment by Will — September 13, 2010 @ 2:20 am

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