Thread by @tedtalksmacro

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'Max pain' is often talked about and is made out to be quite complex, so let's make it simple!

The 'Max pain' price refers to the option 'strike price' for which the most number of options contracts will expire worthless 📉

Follow this thread and you may learn something 😀

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The 'max pain' theory suggests that the underlying asset price e.g. #Bitcoin will gravitate towards that max pain price headed into the option expiry (OPEX)

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Theory behind this is that typically market makers attempt to remain 'hedged' against their open interest

When a market maker deals a 'call' or 'put' it's in their best interest to remain hedged that position. They do this by longing/shorting the futures market for example.

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Here's an example:

🧸Ted buys a call option today at Ethereum's $2,600 strike (same as current spot price) expiring on May 28th

🧸Ted pays $200 for the option

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Scenario #1

🔶 Price on May 28th is $3,600
🔶 Value of Ted's option is $1,000

😡 Market maker LOSES $800

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Scenario #2

🔶 Price on May 28th is $1,600
🔶 Value of Ted's option is $0

😀 Market maker makes $200 (original price paid for the contract)

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As you can see, there is a LARGE incentive for market makers to manipulate the spot price of the underlying asset, closer toward the 'maximum pain' price.

I hope this was easy enough to follow! 😀

RT appreciated 🤝