Yesterday, two friends asked about Max Pain. So I wrote this for everyone to refer to 🥰
Max Pain is common in options trading. It represents the price at which most buyers of options contracts (calls and puts) will incur the most losses at expiration, while the issuer of the contracts will benefit the most.
💥 Meaning:
1. This is the price that market makers wish the underlying asset (for example: stocks, crypto) will be at when the options expire, as they will pay the least amount to the buyers.
2. There is a HYPOTHESIS that the market price tends to move closer to the Max Pain area as the expiration date approaches, due to the impact of hedging and manipulation by large institutions.
3. Some traders use Max Pain as a signal to consider the price trend in the short term, especially as the expiration date of options approaches.
💥💥 Why don't I use Max Pain in my analysis???
Because it is also a supporting tool like the Liquid chart, but it is not as closely aligned with the market as Liquid for the following reasons:
- The Max Pain levels actually apply to ETFs related to BTC, not directly to the BTC price on the spot market. So even if they want to benefit on the expiration date, the ETFs are aggressively seeding to confuse the psychology of retail investors, trying to push the price closer to the upcoming Max Pain level. It still doesn't have much impact on the market.
---> For example, on February 28, the Max Pain price was 96,000. However, the price of BTC that day was 84,000. A difference of 17%
- The current total market capitalization of crypto is over $3200 billion. Therefore, the total Max Pain of all ETFs a few billion dollars each expiration is a very small figure. And that total is also divided among many other parties, not just Binance.
---👉 You can check the total Max Pain on Coinglass as well. And the Max Pain on Binance on the website.
💥 My personal conclusion is: it affects the psychology of retail traders to pull the price closer, but not significantly. The market is still largely influenced by many factors: actual supply and demand, news, cash flow, ETFs, macro policies...
💥 I always choose the tools and news that are most relevant and impactful to the market, rather than distant and vague. That's why I meticulously accompany everyone in every step of the price movements in the short term ❤️