How Stocks Get Pinned

Tomorrow is the last day to trade the February series of options before they expire Saturday at 5 PM. I am going to look for some higher priced stocks to be pinned to a strike price so that we can get a good day trade in.

Evidence shows that there is clustering of stock prices around strikes on expiration Friday for stocks with options but no evidence that it happens for stocks without options or on other Fridays where there is no expiration.

The stock doesn’t move much from the Thursday before, today. So we can look after the close tonight and see which stocks are close to a strike and keep an eye on those to see if they get pinned at the open of trading Friday.

How Stocks Get Pinned

The evidence shows that pinning happens and that it is related to options expiration. How does it happen?

Public traders generally don’t delta hedge their positions while market makers do. So say Baidu is trading at 137, which it is now. Holders of the 135 calls are in the money and will be assigned stock on Saturday. If they do not want the stock, they will sell their options tomorrow for a nice profit. Market makers will buy the options, that is their job. To hedge out their exposure to price movements, they will sell stock. That way, if the stock moves up the call value moves up and the value of the short stock position moves down. They are delta neutral. This selling of stock moves Baidu’s price down towards the 135 strike.

Public holders of the 140 puts who do not want to deliver stock can sell their puts to the market makers who will buy stock to inoculate their position. This will tend to move the price up. This is more likely to have an effect if Baidu is fluctuating around 135 tomorrow. The buying and selling around 135 will tend to push it and pin it to 135.

The Trade

So if in the morning we see that one of these expensive stocks is getting pinned near a strike, we can sell a strangle that expires Saturday.

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