The name "pin" within the options market refers to the underlying stock asset closing the day on or near the option strike price at expiration. An example can be seen with security XYZ that trades at $24.00 one day before options expiration. Security XYZ also has option contracts with a strike price of $25.00. The day of option expiration when the market closes security XYZ is trading at $25.03 . This is usually referred to as XYZ getting "Pinned" at 25.
Why does pinning happen? The pinning happens because of delta hedgers and price manipulators. Delta hedging on existing purchased option positions push the stock price towards the strike price at expiration. We also have stock price manipulation by various option writers that have an interest of expiring the contracts worthless.
Pinning happens on the day of expiration which is a Friday. It can also start happening as early as Thursday the day just prior to its expiration date. Activity usually picks up on both dates.
The things to look for to determine where the pinning will happen is the volume and open interest of the various option contracts. The contracts with the most volume and open interest on the call and put side should be looked at. The reason for this is because the writers of the contracts want them to expire worthless so that they keep the premium. The strike price that is in between the call and put is usually the price of the pin. Weekly pinning is now occurring since the arrival of weekly contracts such as AAPL.
Because of the Delta hedgers and market manipulators, the stock volatility drops. The price of the stock will tend to cluster around the inside call and put benefactors. The stock will tend to cluster towards the strike price with the most amount of beneficial interest of the writers. You can easily determine this by adding up the open interest of both the call and the puts. The strike price between the calls and puts will more than likely be the area of the pin.
Pinning in stocks is very common. It happens because of hedgers and manipulators. The day of the pinning is on Fridays. The characteristics usually have the most activity in the call and puts. The next time you pull up a quote on Apple on a Friday try to see if you can figure out where the pinning price will be.
Author Resource:
Vixiana Nyseia chats about the economic markets and NYSE Volume . She also blogs about some of the regulatory compliance gossip of the day. On her days off she trots on the strand and does Yoga.
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