is finding the pin down target like finding a pin in the haystack ?

Discussion in 'Options' started by darwin666, Dec 25, 2009.

do Market Makers manage to occasionally pin down stocks in ranges on expiry ?

  1. YES

    5 vote(s)
  2. NO

    2 vote(s)
  1. this is something which we have heard a lot.. max pain theory.. and many others..

    My observation is that stocks tend to flucutuate around a set price and it makes sense, for example if in 4 weeks a particular stock has stayed in a 5$ range, then on the last day. why should it break out if that

    interesting WSJ article

    * The Wall Street Journal

    * NOVEMBER 20, 2009

    Pinning Down Stock Prices Using Options


    NEW YORK—Shares of Intuitive Surgical have a better-than-average chance of closing Friday's session near $280, according to a recent analysis of the company's options.

    Because of a phenomenon known as "pinning," shares of Intuitive Surgical and a handful of other stocks could end Friday's session at predetermined prices, due in part to professional market makers who own large amounts of options at those levels.

    In the case of medical-equipment maker Intuitive Surgical, market makers appear to hold positions in November $280 calls and November $280 puts, according to an analysis by Société Générale. As a result, they could buy and sell large amounts of the company's stock to hedge those positions, increasing the odds that Intuitive Surgical closes Friday at that price. Intuitive shares ended Thursday at $278.68, down 95 cents, or 0.3%.

    There are several other companies whose stocks could be affected by pinning, according to Société Générale. Among them are Oshkosh, whose stock could close near $40; Southern Co., whose stock could close near $32; and Plains Exploration & Production, which could end the session at $28. Research In Motion could close at $60, and Celgene could close at $55.

    Pinning, or "pin risk," has existed for years. But its effect on the stock market has grown as options have become more popular. Pinning refers to situations in which market makers inadvertently push a stock toward a certain price—or "pin" the stock to a certain price—as a result of their hedging activities.

    Here's how it works: When market makers buy options, they often hedge themselves using stock. When they buy call options, for example, they sell stock. And when they buy put options, they buy stock.

    When the options are about to expire, as they will on Friday, market makers buy and sell thousands of shares of stock to adjust those hedges. In doing so, they inadvertently push the stock toward the strike price of the options they hold. In other words, they "pin" the stock to a certain price.

    There are various reasons why options traders keep track of pin risk. Some try to use the information to make money. Armed with knowledge of where a stock could close on expiration day, they sell "straddles" in a company—selling equal amounts of both calls and puts—hoping to make money on options that could expire worthless.

    Other traders use the information to make more informed decisions about their holdings.

    "Everyone who has an options position going into expiration could be impacted by this phenomenon," said Vincent Danre, a quantitative analyst at Société Générale who composes the monthly report on pin risk.

    Attempts to determine which stocks could be pinned, however, are far from flawless. When Mr. Danre scans for possible candidates, he doesn't know whether market makers are long or short the at-the-money options, a factor that plays a huge role in determining whether pinning will occur.

    What's more, Mr. Danre notes that he can't account for external events—such as quarterly earnings or ratings changes that might affect stock prices on any given day.
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  2. rwk


    If you want to see a recent case of pinning action, check out RIMM on 12/18/2009.
  4. There are almost 3,000 optionable stocks. Why is RIMM closing at 70 on 12/18 pinning rather than a data point of a normal distribution?
  5. rwk


    The price hovered around 70 for about the last 3 hours on expiration day. Most options traders consider a close within about 0.20 or 0.30 of the strike to be a pinning effect. BTW, according to Natenberg, "pin risk" is being short an option that expires at a price exactly on the strike. The risk comes from not knowing whether the position will be assigned an exercise. Options 0.01 or more ITM are automatically exercised. True pin risk looks pretty rare. Maybe my perspective is colored because I just started trading options, and I was heavily short the 70 calls for my first trade. I liquidated a little earlier than I should have because of inexperience.
  6. It's jibberish.

    Stocks do not get pinned - but normal distribution tells you that some stocks MUST end trading at the strike price.

    When MMs own the strike, they trade their gamma. Thus, they sell above the strike, drive the stock lower. They buy below the strike, driving the price higher.

    This is the natural method for option traders. It is not a defined effort by a group of traders to pin the stock.

  7. I know there's some respectable study that supports pinning but if I recall correctly, it's an effect of nickels and dimes and for most, particularly retail, that's not going to be something worth chasing.

    It's been some time since I've done it but over a multi-month stretch I looked at the distance of expiration prices from strikes and every month the there was an almost even distribution and no exceptional number of pins, regardless of the distance criteria (10 cts, 25 cts, 50cts, etc.).

    RIMM is a bad choice as an example of pinning because it announced earnings Thursday PM. Who could say in advance that it would rise 1.5 to 65 or 6.5 to 70 or vice versa on a drop to 60 or 55?

    Since I have an open mind and I'm willing to be convinced otherwise, , I invite anyone to post stock symbols and prices 1-3 days before expiration, predicting the strike that will be pinned. If you succeed reasonably consistently, I'll subscribe to your newsletter :)
  8. 1) 4-2.
    2) That's the "thing". Traders can feel more certain about pin risk when there's only 1 to 3 days remaining until expiration, not 1 to 3 MONTHS until expiration. All you need to do at that point is just focus on the nearest strike prices and any strikes that have gigantic open interest for directional price bias.
    3) You don't have to subscribe to my newsletter. A $25 gift card to HD, BBY or SBUX will suffice. :cool: