GME max pain is an options term referring to the price that GameStop (NYSE: GME) will finish at with the lowest payout for options holders. Traders pay attention to this level to see how options are positioned.
However, it’s important to note that this is purely a theory. There is no guarantee that GameStop will finish at this level. Whilst it can be a useful tool for traders to use to understand options, knowing how it works, when it can be used, and other market data can help investors be more careful.
What is GME Max Pain?
The max pain level is the theoretical price of the stock based on existing call and put options. It shows what price GameStop would finish at with the lowest combined intrinsic value.
In terms of GameStop, this looks at the options chain available for GME. It can change depending on how traders position their options. There can be different levels depending on when the options expire.
How is GME Max Pain Calculated?
The max pain level looks to understand how much value the existing options will have based on various possible prices.
Call Options
This generally means the buyer has the right to buy shares at the strike price. On expiry, the option has intrinsic value if the stock price is above the strike price. In the example below, if GameStop closes at $30, the GME call option with a $25 strike price has $5 intrinsic value.
Put Options
This generally means the buyer has the right to sell shares at the strike price. On expiry, the option has intrinsic value if the stock price is below the strike price. If GameStop closes at $25, the GME put option with a $30 strike price has $5 intrinsic value.
The max pain looks to understand what the combined intrinsic value would be for existing calls and puts. The price that creates the lowest amount is then considered the theoretical max pain. Options generally represent 100 shares; however, this can be adjusted. This must be taken into consideration by calculating using the multiplier for the options contracts.
Why do Traders Pay Attention to GME Max Pain?
GameStop has been popular amongst retail traders, so people may be interested in seeing how the options are positioned. The max pain can give some context with regards to how the options are positioned. If many contracts are at certain strike prices, this may be useful.
Traders may look at this to:
- See if the theoretical max pain aligns with the current GME price.
- Look at the open interest for calls and puts at different strike prices.
- Consider possible levels the price may go to around the weekly or monthly expiries.
- Provide some context with other market data.
However, this is just one piece of information. News, earnings, overall market factors, and changing sentiment can have a much bigger impact on the stock price.
How to Find the Current GME Max Pain Level
As this depends on how the options are positioned and what expiry date you’re looking at, you’ll need to look at an options analytics platform. This will show the data of the options chain. Once you have found the GME options chain, select the expiry you want to look at. Then look at the open interest for calls and puts at different strike prices. Using a max pain calculator or adding up the total payout for the options. Compare this with the current price and other market data.
Make sure to check that the data is up to date. If it was from previous trading, it may not reflect the current options positioning.
Is GME Always Going to Go to Max Pain?
No, this isn’t a reliable way to trade. Whilst some traders believe that options can affect the price around expiry, the max pain doesn’t guarantee this. If the GME stock is currently trading at $28 and a particular options expiration has a calculated max pain level of $25, this doesn’t mean it will drop to $25. Positive news, strong buying, and changing sentiment could cause the price to rise.
It also does not guarantee that market makers are trying to push the price to that level. There are many factors affecting the price of the stock.
GME Max Pain and Other Market Data
The max pain can be more useful when looking at other data.
Max Pain The theoretical price that will create the lowest combined intrinsic value. Open Interest How many options are open. Implied Volatility The implied volatility of the market. Volume How many shares/contracts have been traded. Put Call Ratio Compares puts and calls (depending on the calculation).
All of this data shows different things. When looked at together, it can give a bigger picture.
Final Thoughts
GME max pain can be a useful concept to understand how the options are positioned and what the theoretical payouts would be. It can help traders to look at how the existing calls and puts relate to different prices.
However, it shouldn’t be used as a reliable indicator for where GME may go next. Always make sure the latest options data is being used and consider what expiry you’re looking at. Take overall market conditions into consideration when making any financial decisions.
