See the attached graph above: the blue dots are the actual plots of the amount of QQQQ put & call contracts that will be in the money at each hypothetical QQQQ closing price point on Jan 18, that is the amount of money the option writers will need to pay option buyers (each unit equals $100 million), based on today's open interest numbers.
The premise is that the institutions that sold those options would prefer to pay out as little as possible, so they have a preferred range for the QQQQ price to fall on at option expiration day. Since these institutions are amongst the most powerful market participants, they frequently get what they wish for.
The pink line is a plot of the following mathematical model:
y = -4.86 - 0.145 (x - 49.97) ^1.810
whereas:
a = 49.97 : the max-pain point, the price point that is least painful (most profitable) for option writers, and most painful for option buyers;
b = -4.86 : amount in the money at the max-pain point;
c = 0.145 : extra amount of pain when price move $1 in either direction, roughly correspond to amount of put and call contracts with strike near the max-pain point;
d = 1.810 : a measure of the degree of concentration of contracts around the max pain point; how fast will the pain grows exponentially for the option writers as price deviate from the max pain point.
The volume for Feb contracts are still light, however, for March contracts, there has been quite a few contracts on the put side. This gives a max pain number of 51.01 for March contracts -- however, because the call side volume is light, this number is quite tentative for now and subject to revision.
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