Crypto glossary
Max pain
Max pain is the strike price at which the most open options would expire worthless, causing the greatest total loss for option buyers at expiry.
To calculate max pain, analysts take all open calls and puts for a given expiry and work out, for each possible settlement price, how much those options would pay out. The strike where the total payout is lowest is the max pain point. Data sites publish it before the large monthly and quarterly expiries of bitcoin and ether options on Deribit.
The theory behind it is that option sellers, often market makers, benefit when price settles near that level, and that hedging flows can pull price towards it as expiry approaches. Crypto media frequently report the max pain level alongside the notional value of options expiring on a Friday.
Evidence for the effect is mixed. Spot and perpetual markets are much larger than the options expiring, dealers are not always net short, and price often settles far from max pain. It is better treated as a description of where open interest sits than as a price prediction.
Example
Ahead of a quarterly expiry with 7 billion dollars of bitcoin options open, the max pain level sits at 95,000 dollars while BTC trades at 101,000, and analysts debate whether price will drift lower into Friday.