Pin Risk

AAA

DEFINITION of 'Pin Risk'

A risk that the writer of an options or futures contract faces when the price of the underlying asset closes at or very near the exercise price of the contract upon expiration.

INVESTOPEDIA EXPLAINS 'Pin Risk'

This is a very serious risk because if the asset closes at or very near the strike price upon expiration, the options holder could decide to exercise his or her option and the writer could be assigned to the position. For example, say the purchaser of a $30 call wishes to exercise the option to buy the stock if it closes at this price at expiration. If the position is not covered by the writer, he or she will end up with a short position in the stock and all the risks associated with this position. The reverse is true for a put, leaving the options writer in a long position that is potentially going to lose money.

RELATED TERMS
  1. Pinning the Strike

    The tendency of a stock's price to close near the strike price ...
  2. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  3. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  4. Exercise

    To put into effect the right specified in a contract. In options ...
  5. Assign

    The act of clearing houses and brokerages selecting short option ...
  6. Naked Call

    An options strategy in which an investor writes (sells) call ...
Related Articles
  1. Cut Down Option Risk With Covered Calls
    Options & Futures

    Cut Down Option Risk With Covered Calls

  2. Naked Call Writing: A Risky Options ...
    Options & Futures

    Naked Call Writing: A Risky Options ...

  3. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  4. All About Liquid Commodities
    Options & Futures

    All About Liquid Commodities

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center