Does max pain work?

For each candidate strike, add up what every call and put in that expiration would be worth if the stock closed there. The strike with the smallest total is max pain. It uses only open interest, not prices or volatility.

The usual story is that option sellers steer the stock there. There is no evidence of that kind of control in liquid markets. The better explanation for any pull is hedging.

If dealers are long gamma around the strikes near max pain, they sell rallies and buy dips, which pulls the price toward the heavy strikes. That pinning is strongest on the last day or two before a large expiration and in stocks with heavy open interest relative to daily volume.

Earnings, macro data and strong trends overwhelm it. When dealers are short gamma, hedging pushes the price away from heavy strikes instead of toward them. Max pain also shifts as open interest changes, so a level read on Monday may not be the level on Friday.

Use it with gamma exposure: a max pain level that sits near a large positive-gamma strike is worth more attention than one standing alone.