Pin risk (options) - How do you handle it?

M

mydann

Pin risk occurs when the underlier of an option contract settles close to the option's strike value at expiration. In this situation, the underlier is said to have pinned. The risk to the writer (seller) of the option is that they cannot predict with 100% accuracy whether the option will be exercised or not. Therefore, the writer may end up with a residual position in the underlier. There is a chance that the price of the underlier may gap adversely, resulting in an unanticipated loss to the writer. In other words, an option position may result a large, undesired risky position in the underlier on the Monday following expiration regardless of the actions of the trader.
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IMO, the risk is not only at the RTH closing time on expiration day. Option holder can exercise an option as late as 16:30 EST, 30 minutes after the RTH closing. When there is any price jump during the 30 minutes after RTH, it may put the option writer at risk.

Let's say you short 1 GOOG call 470 expiring, it closes at 468 at 16:00 EST on expiring Friday and GOOG jumps to 485 at 16:20 EST. Will you worry the assignment?

How do you handle the situation like this? Will always close the short position with extra cost a wise idea?

I don't write naked option but face the same problem with option spread.

TIA
/Daniel
 
You are correct. Actually, option writers have risk until later than 30 minutes after the close. It varies by clearing firm but market makers can exercise later than that. The only solution is to cover any short option that you think might be in danger. Your risk/reward is not very good in that situation. Talk to anyone who writes options a lot and they will have a story about how one time not paying 5 or 10 cents to buy it back cost them a huge loss.
 
Pin risk is meaningless if you're short the atm combo. Every option writer would love to carry pin risk.

When in doubt, get out. For the want of an eighth the Kingdom was lost. Get the picture?
 
Quote from atticus:

Pin risk is meaningless if you're short the atm combo. Every option writer would love to carry pin risk.

When in doubt, get out. For the want of an eighth the Kingdom was lost. Get the picture?
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Why is pin risk meaningless for short atm combo?
 
Quote from atticus:

It's best-case for the writer.
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If there is a big gap, the writer will still lose money, right?

Last month, I shorted both rut 820 put and 820 call. It gapped up around 15 points and i lost money. Why is it the best case for writers?
 
Quote from stock777:

Why is it fair for MM's to be able to exercise well after everyone else?

Can you say free ride?
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It's not about a free ride, the cutoff time is simply up to the clearing firm. If you are on the floor you don't have time to go upstairs and fill out the forms by 4:30. From the CBOE's site:
"Different firms may have different cut-off times for accepting exercise instructions from customers, and those cut-off times may be different for different options.
Although equity options literally expire on the third Saturday of the expiration month, a day reserved for brokerage firms and The Options Clearing Corporation to confirm customers' positions, the day expiring equity options last trade is the Friday before expiration, or the third Friday of the month. This is also generally the last day an investor may notify his brokerage firm of his intent to exercise an expiring equity call or put."
So a retail brokerage is simply going to set a cutoff time and that's it, but a clearing firm can, if they wish, give a little extra time.
 
If there is a big gap, then it is not getting pinned to your short strike and not what he is saying.

If you have the 820 short combo and the underlying is hovering around 820 you would love to see it get pinned to the strike.

Quote from yip1997:

If there is a big gap, the writer will still lose money, right?

Last month, I shorted both rut 820 put and 820 call. It gapped up around 15 points and i lost money. Why is it the best case for writers?
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