Strike Price Pinning Part 2: The Pin Empire Strikes Back

As I mentioned in my last post, we reside in a New Pin World Order thanks to more frequent expiration and tighter strike prices.

Thanks to CBOE Weeklys options, we now have expiration day every Friday. Instead of 12 expirations per year in every name that lists options, we now have 52 in the most popular ones. Throw in Quarterly options and we have as many as 56 expirations per year for certain securities.

Still, the dynamics of strike price pinning fundamentally remain the same. High open interest and low volatility both make pins more likely. It doesn’t matter whether an option began its life as a LEAP with 2 years until expiration, or a Weekly with just 8 days.

On the one hand, we should see fewer pins on weekly expirations than we do on regular expirations for the simple reason that 8 calendar days of life does not provide enough time to generate a large open interest.

But, it’s not just the quantity of open interest that makes a pin more or less likely – it’s the nature of that open interest. Namely, if active traders hold more of the calls outstanding (or puts outstanding for that matter) than pins become more likely. And given the short shelf life of Weeklys, we can say with pretty strong certainty that active traders tend to own the lion’s share of the outstanding options.

Why does this matter? Well, remember why a stock may be pinned to begin with. Options owners who are facing rapidly decaying premium on their holdings may buy and sell the stock just above and below a strike price to help offset that accelerating time decay.

Active traders can be what we call “dynamic hedgers.” When a stock moves, the delta of an option position changes. The less time to expiration, the more the delta can change with even small stock movements.

This changing delta (known as gamma) creates opportunities for dynamic hedgers to aggressively trade stock back and forth to take advantage of this high gamma. So it stands to reason that more open interest in the hands of dynamic hedgers increases the chances that a stock will be pinned to a strike price.

Remember that all of us only see open interest numbers on a close to close basis. There may be a big difference in open interest on an intraday basis as traders open and close positions. In fact, we very often see volume for Weeklys that exceeds the open interest in certain strikes on certain days.

We have not had active Weeklys trading long enough to determine whether these stocks pin more or less often than for a regular expiration, but I suspect that we’ll see it will end up about the same.

And there’s one more trend that indisputably make pins more likely – and even renders the meaning of a pin less significant. Instead of 2.5 point or 5 point width between strikes, we now often see listed strikes just 1 point apart. For stocks over $200, we now have strikes 5 points apart, instead of 10 points apart like they were in the past.

So, in many cases now, stocks can’t help but land near a strike. And for most traders and investors who don’t follow intraday price action, there’s very little chance of actually guessing which of the many listed strikes a stock may land on.

So what does it all mean? Well, keep the concept of pins on your radar, but remember this: Real news always trumps any tendency to pin to a strike, no matter the pre-existing volatility or the nature of the open interest configuration.

Real news does matter. And that doesn’t have anything to do with options.

Important Note
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Content, including research, tools and securities symbols, is for educational and informational purposes and should not be intended as a recommendation or solicitation to engage in any particular securities transaction or investment strategy. You alone are responsible for evaluating which securities and strategies better suit your financial situation and goals, risk profile, etc. The projections regarding the probability of investment outcomes are hypothetical and not guaranteed for accuracy or completeness. They do not reflect actual investment outcomes and are not guarantees of future results, and do not take into consideration commissions, margin interest and other costs that will impact investment outcomes. Content may be out of date or time-sensitive, and is subject to change or removal without notice. Supporting documentation for any claims made in this post will be supplied upon your email request to editor@zecco.com.

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Neither Zecco Trading nor Zecco Forex has participated as a manager or co-manager in public offerings of the securities mentioned herein within the last twelve months.

While Delta represents the consensus of the marketplace as to the theoretical price movement of the option relative to the underlying security there is no guarantee that this forecast will be correct.

While Gamma represents the consensus of the marketplace as to the amount a theoretical option’s delta will change for a corresponding one-unit (point) change in the price of the underlying security there is no guarantee that this forecast will be correct.

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