Pin Risk

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.

BREAKING DOWN '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. Allocation Notice

    An official notification from an options clearing firm to the ...
  2. Covered Writer

    An options seller who owns the underlying security represented ...
  3. Writer

    The seller of an option who collects the premium payment from ...
  4. Naked Writer

    An options seller who does not own the underlying security for ...
  5. Exercise

    To put into effect the right specified in a contract. In options ...
  6. Assignment

    1. The transfer of an individual's rights or property to another ...
Related Articles
  1. Options & Futures

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  2. Professionals

    Option Positions

    Series 7 - Section8: Option Positions
  3. Professionals

    Managing Risk with Options Strategies: Covered Calls and Protective Puts

    CFA Level 1 - Managing Risk with Options Strategies: Covered Calls and Protective Puts. This section concludes with details on covered or naked options. Learn the components and payoffs behind ...
  4. Professionals

    Options: Calls and Puts

    CFA Level 1 - Options: Calls and Puts. Learn the two main types of option derivatives and how each benefits its holder. Provides an example multiple choice question for an option.
  5. Professionals

    Derivative Securities

    NASAA Series 65: Section 10 Derivative Securities. In this section types of derivatives and buying and selling options.
  6. Options & Futures

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  7. Professionals

    Closing Transactions

    Closing Transactions
  8. Professionals

    Calls And Puts

    Calls And Puts
  9. Professionals

    Options: Advantages and Disadvantages

    Options: Advantages and Disadvantages
  10. Options & Futures

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
RELATED FAQS
  1. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  2. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  3. What is the difference between "right" and "obligation" on a call option?

    Learn what a call option is, what determines a buyer and seller of an option, and what the difference between a right and ... Read Answer >>
  4. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  5. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  6. After exercising a put option, can I still hold my option contract in order to sell ...

    Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center