No more pin risk in /ES?

Discussion in 'Options' started by kcgoogler, Jun 14, 2016.

  1. Hello folks,

    The way i am reading it, given the current way CME is calculating settlement price for ES it seems that if you come into expiry with locked in positions (conversions, boxes), pin risk is eradicated. Because given the volume weighted calculations, settlement will very very likely be between two ticks - never at any particular strike.

    Could i be missing something?



    -gariki
     
  2. That is for End-of-Month Option and Weekly Options.

    Has nothing to do with the quarterly cash settlement at expiration.
     
  3. Sig

    Sig

    I may be missing your point, but the E-mini still "Delivers into one quarterly E-mini S&P 500 futures contract" per CME. My understanding of pin risk, it is the risk that an option you thought would settle out of the money settles in the money or vice versa. In the case of the E-mini, it means you think you won't get delivery of the futures contract and you do, or vice versa.
    The way the fixing price is determined doesn't impact that at all. You could still have a position where the strike of one leg of the option is right at the trading price a second before closing and you won't know how it will turn out until after the fixing price is determined. If you were trying to stay flat the position or offset something else, the pin risk is the risk that you can't do that.
    In other words, if you think your option will exercise and you buy the opposite E-Mini contract so that you're flat, then the option doesn't exercise, you're long(short) the E-mini position you bought. Or the opposite, you think the option will expire without exercising but it does and you've got an E-mini position you don't want.
     
  4. Sig

    Sig

    Why would you be concerned with pin risk on cash settlement?
     
  5. Sig,

    You are kind of right; for Quarterly cycles (June 3rd week options for example), it probably doesnt matter since the options will settle to the future which will immediately settle to cash. But for the other months, if you have a box, for example short 2000 Call and long 2000 put (for 2 legs) and ES settles exactly at 2000 your position coming into Monday morning will be very undeterministic. But if the closing print is always going to be not at a particular strike; either say 2000.19 or 1999.87, for all the locked in positions it doesnt matter where the closing ends up; as long as it doesnt pin to a strike.

    But in either case (Quarterly or Serial months), the settlement price is important since its what determines whether your options get assigned or not.
     
  6. Sig

    Sig

    I get that, but I don't think there's ever been a situation where the settlement is nondeterministic. The pin risk isn't that the answer is unknowable, it's that you can't know it in time to do anything about it if you plan on hedging or trying to be flat.
     
  7. jeb,

    According to this CME link, http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_contractSpecs_options.html, Quarterly options (example this June 3rd week options) stop trading at 8:30 on Friday - then my understanding is the settlement price is what determines which of your option contracts get assigned to you and which ones wont.

    Now the settlement price itself says weekly option; but includes the 3rd week options as well. No? This friday for example.
     
  8. Let me rephrase; if say it settles exactly at 2000 and you have a long call and a short put at 2000. And say a short call at 1950. Now what is your position coming into Monday? (for serial option series).
     
  9. Sig

    Sig

    It strikes me (no pun intended) that we may be talking about different phenomenon. My definition of pin risk is something like this from Investopedia:
    "DEFINITION of 'Pin Risk'
    A risk that the writer of an options or futures contract faces when the price of the underlying asset closes at or very near the exercise price of the contract upon expiration.

    BREAKING DOWN 'Pin Risk'
    This is a very serious risk because if the asset closes at or very near the strike price upon expiration, the options holder could decide to exercise his or her option and the writer could be assigned to the position. For example, say the purchaser of a $30 call wishes to exercise the option to buy the stock if it closes at this price at expiration. If the position is not covered by the writer, he or she will end up with a short position in the stock and all the risks associated with this position. The reverse is true for a put, leaving the options writer in a long position that is potentially going to lose money."

    It sounds like your definition is more along the lines of "The risk that no determination of exercise can be made if an option settles at exactly the strike price". I don't know that this has ever been an issue. It's easy to write rules like the CME's rule which states for calls "An expiring call option shall be in the money if the corresponding Fixing Price is strictly above such option’s exercise price, and shall be out of the money if the corresponding Fixing Price is at or below such option’s exercise price.", i.e. if the fixing prices is exactly at the strike it is by definition out of the money for calls and not exercised, if it is even a fraction above the strike it is by definition in the money and exercised. The corresponding rule for puts is "An expiring put option shall be in the money if the corresponding Fixing Price is strictly below such option’s exercise price, and shall be out of the money if the corresponding Fixing Price is at or above such option’s exercise price." (http://www.cmegroup.com/rulebook/CME/IV/350/358A/358A.pdf page 5). You can obviously go either way on the definition, but as long as it's pre-defined and published there is no nondeterministic risk.
     
  10. Thanks for the link Sig. I will have to read it more thoroughly but it seems CME is saying that exercise will be based on a rounded value of Settlement price; that kind of stinks since that means for locked in positions there is still a pin risk.

    "358A01.E. Exercise Prices In each month in the March quarterly cycle (Rule 358A01.D.1.) the Exchange shall determine an Exercise Price Reference on the Business Day first preceding the day on which the final settlement price of futures for delivery in such month (Rule 35803.A.) is scheduled to be determined. Such Exercise Price Reference shall be set equal to the daily settlement price of such futures, rounded down to the nearest Index point."

    regards!
    -gariki
     
    #10     Jun 14, 2016