DEFINITION of 'Pinning the Strike'

Pinning the strike is the tendency of an underlying security's market price to close at or very near to the strike price of heavily traded options (in the same security) as the expiration time nears. This doesn't always happen, but it is most likely to occur when there is significant open interest in a particular expiring option that is near the money. For example, if a stock is trading near $50 and there is heavy trading in both puts and calls at this strike price, there is a tendency for the stock price to be "pinned" at $50 as traders unwind their positions at expiration.

BREAKING DOWN 'Pinning the Strike'

Pinning the strike most often occurs in stock markets with listed options, but may happen for options with any sort of underlying. Pinning the strike happens most frequently when there is a large amount of open interest in the calls and puts of a particular strike as expiration approaches. This is because options traders become increasingly exposed to gamma as contracts approach expiration, accelerating into the hours just before the expiration date and time. Gamma is the sensitivity of an option's delta to changes in the price of the underlying. The delta, in turn, is the sensitivity of an option's price (or, premium) to changes in the price of the underlying.

As the gamma grows, small changes in the underlying security's price will create larger and larger changes to the option's delta. Options traders, who are often hedging in order to be delta neutral (directional neutral), will need to buy or sell increasingly large numbers of shares in the underlying in order to keep their risk exposure in check.

Pinning a strike imposes pin risk for options traders, where they become uncertain whether or not they should exercise their long options that have expired at the money, or very close to being at the money. This is because at the same time, they are unsure on how many of their similar short positions they will be assigned on.

Example of Pinning the Strike

For example, say XYZ stock is trading at $50.10 and there is a great deal of open interest in the 50 strike calls and puts. Say that a trader is long the calls. As the stock goes from $50.10 to $50.25, he will be exposed to an increase in deltas, and so will sell the stock at $50.25 and lower, pushing its price back toward $50. The owner of a hedged long put will also need to sell shares as the stock rises from $50.10 to $50.25 - this is because he already owns shares as a hedge against the long put, but as the stock rises, the put options' deltas decrease and so he or she has too many shares and needs to sell, again pushing its price back toward $50. Say the price drops below $50 down to $49.90. Now the call holder will have to buy shares, because he will be short too many shares from before now that the call's deltas have gotten smaller and smaller. Likewise, the put owner will have to buy shares because the put deltas would have grown larger and larger and they don't own enough stock. This will push the price back to $50.

RELATED TERMS
  1. Pin Risk

    Pin risk is the uncertainty that the writer of an options contract ...
  2. Call Over

    A call over is when the buyer of a call option exercises the ...
  3. Gamma Hedging

    Gamma hedging is an options hedging strategy designed to reduce, ...
  4. Interest Rate Options

    An interest rate option is a financial derivative allowing the ...
  5. Average Strike Option

    An average strike option is an option type where the payoff depends ...
  6. Expiration Date (Derivatives)

    The expiration date of a derivative is the last day that an options ...
Related Articles
  1. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  2. Trading

    Option Greeks: The 4 Factors to Measuring Risks

    In this article, we'll look at Greek risk measures: delta, theta, vega, gamma and explain their importance that will help you better understand the Greeks.
  3. Trading

    Using the "Greeks" to Understand Options

    The Greeks provide a way to measure the sensitivity of an option's price to quantifiable factors.
  4. Trading

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  5. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  6. Trading

    Bear Put Spreads: An Alternative to Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
RELATED FAQS
  1. How do I set a strike price for an option?

    Learn about the strike price of an option and how to set a strike price for call and put options depending on risk tolerance ... 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. Why are options very active when they are at the money?

    Stock options, whether they are put or call options, can become very active when they are at the money. In the money options ... Read Answer >>
  4. What makes a straddle 'delta neutral?'

    Learn what the option Greek delta is and what makes a delta-neutral position in a straddle. Compare changes in an option ... Read Answer >>
  5. 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 >>
  6. What Happens to Call Options If a Co. is Bought?

    Typically, the announcement of a buyout offer by another company is a good thing for shareholders. Read Answer >>
Trading Center