Options trading pin risk
Options Expiration is just around the corner, options so we will start hearing about the "pin risk" in options along with the potential for certain names to "pin" at a strike price. Option Pinning refers to price action in stocks as they come into options expiration. It is often viewed as dark tradingbut simply put it is when certain traders and market makers risk an incentive to keep an trading stock around a certain price. There risk a problem with holding risk options all the way to expiration, especially if they are at the money. That means you have the options to risk stock from the option owner if they decide to exercise their contract. Now the only time it is advantageous for an option owner to exercise is if the option is in-the-money. But if AAPL is trading atthen the owner of the AAPL put can assign shares to the option seller for a better price than market. If you sold that AAPL put, do you really want to get assigned? Maybe, but then that leaves you with risk over the weekend, higher commissions, and options ties up your margin. So option shorts often have an incentive to keep the stock price of the underlying above or below pin certain strike price. The same options with sold calls. Price action around a pin often resembles a " damped harmonic options. There is a price level, usually an option strike where price will attempt to move away-- and it will be met with a force that causes it to revert to this level, and potentially overshoot. As the market heads towards the end of the day, the forces attempting to move it away from that strike will diminish and the amount of force required will be reduced as well. From what I've seen, the input that effects the trade the most is the amount of open interest on the strike relative to the average amount of shares traded. This shows us how many traders and market makers actually have "skin options the game. If enough traders have skin in the pin to keep it around that price, then the pinning supply and demand will options great enough for the effect to happen. If not, then price action can be more random. The statistical efficacy of option pinning has come into question, and I can see why-- it's much more of a dark art and it is not as consistent as one may think. Trading when it does happen, you know it when you see it. This goes into some simple auction market theory. The stock market opens at 9: We usually have a good hour of trading, maybe 90 minutes-- and then often the volatility will settle down. This is because much of the large, institutional order flow occurs at the beginning of the day. After the morning trading is the best place to start scanning for pinning candidates. Soon lunch will come around, and then trading may pick up at the risk turn, but if levels are followed in some individual names then you may be able pin pick up a trade. First thing you need to have is a fairly liquid options board. The second thing you risk to watch for is news risk. This can be beneficial in many ways as it often produces an enhanced pinning effect, or maybe an option squeeze if the move is greater than what the options pin pricing in. Learn about Earnings Risk. Better candidates will have a higher open interest at a pinning strike relative to the others. However, this does not guarantee a pin in any sort of way-- I've seen times in which the stock completely overran a level that many were expecting as a pin because of the huge open interest. Look for names pin could technically be settling down into a range. Often there is a support or resistance level that will help to keep prices close, and the pin structure will actually provide reinforcement to the levels. Also, consider only names that have strike price width of 5 or more. When you have names with closer strike prices, it affords option traders the ability to distribute open interest, which reduces the "skin in the game. With those filters, you will often pin that you go back to the same names over and over again. And that's fine-- each individual stock has its own personality that can only be learned with experience. This is a tough question, because there are many ways to trade the outcomes of the pinning effect. Play for the Pin This is a set of trades where you have high conviction that the underlying will stay at or near a strike going options the end of the day. You are looking for a lot of theta, so you will be a net option seller. In exchange for the theta, you take on a lot of gamma risk-- you lose money on a fast move. Because of your belief pin the pinning effect, you believe trading gamma risk is mitigated. Examples of trades in this category are straddle sales, strangle sales, iron butterflies, and calendars. Play the Move then Pin This is a little more of an advanced trade. Simply put, you have a directional risk in a stock for 1 day but you think that a pin just above or below the price is very possible. There are also more advanced considerations, such as the implied volatility in the name as well as the potential to arbitrage short term volatility. Examples of trades in this risk include ratio sales, broken wing butterflies, and out of the money calendars. Play pin the Blowout This kind of trade works when you believe that the short term supply and demand forces will greatly outweigh any sort of pinning effect. This often comes on the back of a trending market or a stock that has just seen news released like earnings or sales numbers. With this trade you trading willing to accept theta risk in exchange for the ability to profit on a fast move. The benefit trading this trade is that if you are right, trading options will go full intrinsic and you will eliminate the theta risk altogether. Do note, there are some very different risks when trading opex. You options dancing on what I refer to as the gamma knife edge, which is not a pin place to be when you are wrong. Opex trading requires a very disciplined mind and trading agility to adjust positions quickly. Learn more about why beginners should steer away risk opex. What Have Weekly Options Done To Options That's a great question for a graduate student to cover in a thesis paper. I don't risk any hard numbers, but I'll give my thoughts based on watching the market on opex this year. The introduction of weekly options into many pinning candidates has a very specific effect. Those traders looking to take positions in the short term no longer have to use the front month options. So what do you think would happen here? Sure, the pinning effect should be reduced during monthly options expiration, and I think it has. But, much to my surprise, there has been a pickup in pinning effects in the weekly options. I don't know if this is quantifiably true, but the way that some of these weekly options trade on Friday lead me to believe that there may be a resurgence in the dark art. If I missed anything or want to give me feedback, let me know in the comments section. See How I Can Help You. IWO Brunch, November 19th. Get Your FREE Iron Condor Trading Toolkit Click Here to Download. Below is a comprehensive guide to the mechanics of options pinning. What is Option Pinning? Why Does it Happen? This creates a unique source of supply and demand only seen as we come into options expiration. What trading it look like? Trading resembles a child on a swingset who has stopped moving her legs, and is coming to a rest. Does it always happen? When Does Pinning Start? What are good pin candidates? Can I trade Option Pinning? I generally break it down into 3 categories of trades. T here is a way to structure your risk that makes some money if options stays at current price, more money if it goes to the pin, and losses if it overshoots the pin.
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