Max pain and the put/call ratio
Open interest is the number of contracts still open at each strike: positions opened and not yet closed, exercised, or expired. Two popular numbers are read straight from it. Max pain asks where the stock could settle to make the open options worth the least; the put/call ratio asks how puts weigh against calls.
Open interest, briefly
Volume counts the contracts traded today and resets every session. Open interest counts those still open and is published once a day, after the close. Open interest that rises with volume means new positions are opening; open interest that falls means positions are closing. Large open interest at a strike marks where many positions sit, but every contract has a buyer and a seller, so it says how much is open, not which way anyone leans.
Max pain
Take every strike as a possible settlement price, and add up what the open options of an expiry would pay out if the stock settled there: each call's open interest times how far the price is above its strike, each put's times how far it is below. The strike where the total is smallest is the max pain strike, the price at which the most option holders' money is lost.
payout(S) = Σ call OI × max(S − K, 0) + Σ put OI × max(K − S, 0) → max pain = the strike S where it is least
The theory behind it is that option writers, often dealers, gain most there, and that their hedging draws the stock toward it into expiry. The evidence is mixed. Large open interest near the money can pin a stock in the last days before an expiry, through the hedging that gamma exposure describes, but max pain is not a target: news, flows, and the rest of the market move stocks far more. It is most worth watching for liquid names and index products on the day of a large monthly expiry.
The put/call ratio
The put/call ratio divides puts by calls, by open interest or by volume:
P/C by open interest = put OI ÷ call OI · P/C by volume = put volume ÷ call volume
- By open interest, it describes the positions held, and changes slowly.
- By volume, it describes today's trading, and swings from day to day.
A ratio above 1 means more puts than calls. Read as sentiment, a high ratio is bearish, though many traders read extremes the other way: when everyone has already bought protection, the selling may be done. For single stocks the ratio is noisy, since one hedge or one spread can swing it; compare it with the stock's own usual level, and remember that a put bought and a put sold count the same.
Where the open interest sits
More useful than either number is often the picture they come from: open interest strike by strike. The strikes with the most call and put open interest, the call and put walls, are levels where hedging can matter, and the change in open interest since the last session shows where positions were opened or closed, the next-day check on unusual activity.
In Options Meerkat
On a symbol's detail page the open-interest strip (i) draws call open interest up and put open interest down at each strike, for the expiry shown or several summed. Its title gives the max pain strike, the put/call ratios by open interest and by volume, the call and put walls, and the expected move; the axis marks the spot with ● and max pain with ◆. Press i again for each strike's change in open interest since the last session, or x to turn the strip into dealer gamma exposure. The contract list (L) sorts contracts by open interest, dollars open, and open interest added or cut.