Options expiration pinning

[HighFlyer]

hello,

does anybody have any experience with options pinning related strategies? Does options pinning actually take place or is it just a law of averages game?

thanks

[TheBirdLives]

Originally Posted by HighFlyer

hello,

does anybody have any experience with options pinning related strategies? Does options pinning actually take place or is it just a law of averages game?

thanks

Great question, HighFlyer! You got me to do some research.

I had read that pinning occurs. Moreover, I have observed what appeared to be pinning in some of my covered call positions — most recently for me with CVX in December.

I was short CVX DEC 95 calls and long the stock. I did not want to have the calls assigned and be forced to close the long position in the stock.
On the other hand, I'd have been be perfectly happy to have the calls expire and sell new ones on the following Monday rather than pay the premium and fees needed to rollout the DEC calls to JAN call before DEC expiry.

Doing the research inspired by your question, I came up with the following article:

The Effect of Stock Pinning Upon Option Prices

The article, written by a Morgan-Stanley VP and a super-computing consultant, is fairly rigorous in its analysis. Cutting through the math and statistics, my take-aways are:

• Stock price pinning around a strike price does, in fact, occur. The authors gave this finding a 99% level of confidence.
• Stock price pinning can be explained by natural market incentives. That is, the existence of pinning does not imply the existence of market manipulation.
• If a stock is likely to pin at a strike price [see article for the conditions that apply] this has the effect of lowering the price movement of the stock, and therefore lowering the volatility value that should be used to price the option. In other words, an At-The-Money option will tend to have a lower premium near expiry than one would expect from the Black-Scholes model of option pricing.
• From the viewpoint of a covered call investor, the price differential improves the economics of a rollout near expiry of an ATM call.

And a rollout is what I did last December.

Thanks again, HighFlyer, for a great question.

[Alchemist]

Bird, you're back!! We missed you! Several guys wondered where you were, including myself. it's great to have you back here. looking forward to your precious options expertise contribution to the forum!

[aiki14]

Originally Posted by TheBirdLives

Great question, HighFlyer! You got me to do some research.

I had read that pinning occurs. Moreover, I have observed what appeared to be pinning in some of my covered call positions — most recently for me with CVX in December.

I was short CVX DEC 95 calls and long the stock. I did not want to have the calls assigned and be forced to close the long position in the stock.
On the other hand, I'd have been be perfectly happy to have the calls expire and sell new ones on the following Monday rather than pay the premium and fees needed to rollout the DEC calls to JAN call before DEC expiry.

Doing the research inspired by your question, I came up with the following article:

The Effect of Stock Pinning Upon Option Prices

The article, written by a Morgan-Stanley VP and a super-computing consultant, is fairly rigorous in its analysis. Cutting through the math and statistics, my take-aways are:

• Stock price pinning around a strike price does, in fact, occur. The authors gave this finding a 99% level of confidence.
• Stock price pinning can be explained by natural market incentives. That is, the existence of pinning does not imply the existence of market manipulation.
• If a stock is likely to pin at a strike price [see article for the conditions that apply] this has the effect of lowering the price movement of the stock, and therefore lowering the volatility value that should be used to price the option. In other words, an At-The-Money option will tend to have a lower premium near expiry than one would expect from the Black-Scholes model of option pricing.
• From the viewpoint of a covered call investor, the price differential improves the economics of a rollout near expiry of an ATM call.

And a rollout is what I did last December.

Thanks again, HighFlyer, for a great question.

I am also a believer in the phenomenon and anecdotally seem to see a general skewing of stock price toward strike price.