Nonprofit , here is an ideaâ¦How about back testing an AFTER the FACT pin action ? Check just stocks that âsuspiciouslyâ drifted toward the strike/max pain on exp day , lets say from 26.5 to 25 . Then go long stock ( or short put or long call) on Monday betting on price reversal. Just ONE day of testing , lol. And PM me the results if itâs works
Thatâs an idea, but you have worked with option databases so know what a nightmare that is. Itâs not on top of my list. BTW the existence of pinning is certain as climate change. Many scientific stuff much more reliable than my little backtest: http://www.google.com/search?hl=en&q="stock+pinning" Of course how to profit from it is a different matter. Also I donât refer only to pinning, but to various aspects of option market analysis. Beats the MACD, take that from me. I keep your idea in mind
I posted this on another topic but it looks like what you guys are talking about, can anyone help me understand this? --------------------------------------------- Sorry for getting off topic but you mentioned stocks getting pinned to a strike on expiration day. Could you tell me how that works? I have heard that before but always thought it should work the other way, like this: 1) short option holders delta hedge more than longs, so they should drive the underlying 2) if I am short an atm straddle at 10 and delta hedging, if the stock goes to 9.50 I sell and push the price down 3) if the stock goes to 10.50 I buy and push the price up 4) so any small price move away from the strike should get magnified So it seems this should push the price away from the nearest strike with a lot of open interest, not pin it there. So if it really works the other way, what am I missing? Thanks
Well, another explanation is manipulation. In case of ATN ~15K puts represent 1.5M shares. Any one party short these (all big IFâs, I know) will have no scruples buying an avg. 150K volume stock back to the strike. Perhaps..... This is from an elaborate piece fom 2004. Iâm not on top of this and meanwhile others may have debunked (or confirmed) this. (IVT, consider this my preliminary backtest ): -------------------------------- We estimate that the returns of optionable stocks are altered by an average of at least 16.5 bps per expiration date and that at least two percent of optionable stocks have their returns changed on a typical expiration date. During our sample period, there are on the order of 2,500 optionable stocks on any given expiration date. Consequently, these estimates imply that if all optionable stocks are impacted 2,500 stocks have their returns changed by 16.5 bps, if half of the optionable stocks are impacted 1,250 have their returns changed by 33 bps, and if the minimum two percent are impacted 50 have their returns changed by 825 bps. Regardless of the percentage impacted, the associated change in the market capitalization of optionable stocks is roughly $9.1 billion per expiration date. We investigate five possible explanations for the expiration date clustering of optionable stock prices at strike prices. Our tests indicate that delta-hedge re-balancing by investors with net purchased option positions and stock price manipulation by investors who write options in the week leading up to expiration both contribute to the clustering. We find no evidence that the clustering is related to delta-hedging of new option positions, unwinding by non-delta-hedgers of combined stock and option positions, or attraction of prices to round numbers.
nonprophet, thanks for the reply and the link. The manipulation explanation makes sense. Another explanation I didn't consider was that mm's are more likely to delta hedge than others ( they are trying to lock in bid-ask profits and also are likely to be fired for a big short gamma loss), and they also tend to be net long options. There is another paper that shows they tend to be net long gamma: http://www.terry.uga.edu/finance/research/seminars/papers/pearson.pdf If the data they use on open interest by trader type is public, it would be interesting to see if stocks where mm's are long lots of gamma at expiration are the ones that get pinned.
Thanks for the paper. The data is available at http://www.marketdataexpress.com/serviceFeatures.aspx# (the Open/Close data) but only includes transactions on CBOE. I just spent $4.50 on the ATN and the big transactions arenât there! Processing Bulk data to extract this kind of information seems a gargantuan task.
So these were the large ATN transactions: 4 Jan: 14K Jan 30 calls 11 Jan: 14K Feb 30 calls 19 Jan: Jan 30 calls expire worthless (ATN @ 27.24) 22 Jan: 2.5K Feb 25 puts 1 Feb: 4K Feb 25 puts 5 Feb: 6.5K Feb 25 puts 6 Feb: 5K Feb 25 puts resulting in ~15K OI in both Feb 30 calls and Feb 25 puts up till Feb 16 expiration. I checked the CBOE open/close data but these transactions did not occur there. I ask an old friend if he can figure out which were buys or sells.
Feb 30 Calls: 1/11 1:41pm - 13718 traded at .50. Bid was .50, ask was .70 The Jan 30 calls are too old for me to look up. Feb 25 Puts: 2/6 10:38am - 4252 traded at 1.10. Bid was .90, ask was 1.10. 2/5 11:39am - 4715 traded at 1.00. Bid was .65, ask was .95. 2/1 10:04am - 2192 traded at 0.65. Bid was .45, ask was .65. 2/1 10:07am - 1458 traded between .50 and .65 1/22 3:46pm - 2548 traded between .55 and 1.00 1/22 3:52pm - 2341 traded at 1.00 Unfortunately, some of these trades are out of my data window to get the exact bid & ask at the time of the trade. The numbers I posted above are the NBBO, so a trade going off outside of the bid/ask spread is possible.
Just some of my thoughts Starting with: - ATN was mentioned TWO WEEKS ago (volume/open interest can cause big swings -my first post) with observations from intra-day action (subsequent days action in next few posts) (NO PIN WAS MENTIONED ;-))) - Two days before expiration ATN action was .....................strange. - <b>Havoc on expiration</b> (intra day picture in my previous post from Friday). - stock trades on 20x average volume with almost all day being at 25 +- few cents (just happend that this is strike price of puts in question). - in the last 10 minutes the stock trades like aapl (volume and volatility) and just wonder if computer based hedging breaks down with 10 minutes till expiration and stock exactly at strike price. (we are talking ATN, low volume stock not to many know about). My point is: I find browsing historical data very useful (that is way I found ATN to start with) but nothing (no paper) would replace our day-day and intra-day (especially Friday) witnessing of ATN action (stock and options and they relation). We could guess who/what was doing, <b>but the only assumptions I made two weeks ago was that ATN could be very volatile because of options.</b> Therefore, âcrunch some numbersâ, namely, find some other âATNâ for March to look at closely. IV_Trader Your sample just proves the point: if your stock is like âATNâ (our subject here - 100k avg. vol) how do you by 1M (two weeks of volume) without moving the underlying A LOT. At the end of the day your broker will tell you: bought 1M as instructed (average price $50), the stock moved so much (because of your buying) that your puts are OTM and you are stuck with 1M of not liquid stock (there goes you hedge) ;-) You exercise, but regardless someone is stuck with 1M of not liquid stock. FullyArticulate = Thanks for data.
Thanks for the data source. Your right, it does look like a huge task. I'm adding it to the todo list but I probably won't get to it tonight, let me know if you do first!