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.

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RELATED FAQS
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  2. Are there any risks involved in trading put options through a traditional broker?

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  3. How do I change my strike price once the trade has been placed already?

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