Pinning the Strike

What Is 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.

How Pinning the Strike Works

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 of 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, deltas will increase, and at a faster rate as the stock rises — and so the trader will look to sell the stock at prices of $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 because shares are already owned as a hedge against the long put. But as the stock rises, the put options' deltas decrease at a quickening pace, and too many shares will be held long. This prompts the need to sell, again pushing its price back toward $50.

Say the price instead drops below $50, down to say $49.90. Now the call holder will have to buy shares because they 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.

The Bottom Line

Pinning the strike is a common occurrence in the market for options. When there is strong open interest in a particular options contract, the price of the underlying security tends to stay close to the strike price on the day of expiration.

What Is Options Pinning?

Options pinning is a price action that often occurs when options contracts approach expiration. If a particular options contract is heavily traded, the price of the underlying security tends to stay close to the most common strike price on the day the contract expires.

Why Do Market Makers Pin a Stock?

Market makers create options (calls and puts) that give other traders the right to buy or sell a security at a predetermined price. If that price is favorable to options holders, then there is a high likelihood that market makers will have to buy or sell the stock at the date of execution.

What Happens After a Stock Is Pinned?

If a stock is pinned at or near the strike price of certain options contracts, then it is likely that a large number of put or call options on that security may be in the money, leading holders of those contracts to exercise their options. This means that the firms underwriting those options will have to buy or sell a large number of shares at an unfavorable price.

How Do You Avoid Pin Risk?

The simplest way to avoid pin risk is to close the spread on options that are approaching expiration, particularly if they are almost in the money. As explained by Robinhood, a popular trading app, "The best way to avoid pin risk is to close any options that might have a chance to be in the money before the closing bell on expiration."