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The September Expiration Pin Games Begin Here


Learn the rules -- and the limitations.

Got asked some pinning questions on Twitter the other day. It's really not a 140 character answer, so figured I'd be the first to get everyone ready for the September Expiration pin games right here!

A pin refers to a stock or index closing right at strike. The nefarious explanation is somebody goes short options on that strike -- generally calls that are modestly ITM -- and then manipulates the stock via short sells to get it to close right near the strike. One can also infer that all sales are naked unborrowed shorts; they go out of their way to short on minus ticks, and they run dog-fighting operations during the quieter parts of the expiration cycle.

The more natural explanation for a pin is that options owners see their holdings about to expire, and are faced with the decision of either selling/rolling them, hedging more aggressively as gamma and time decay builds up exponentially, or crossing their fingers and hoping for the best. Let's say a large percentage choose the hedging path, and again, let's say this involves a strike where the calls are modestly ITM.

Holders of those calls will now become stock owners if the stock closes above strike, thus they have ever-increasing ammunition to short stock against them. On the margins, this adds supply to the stock above strike and serves to pressure it lower. But if/when it gets to strike, the call owners don't need to short stock any more. In fact now, their calls are close to going out worthless, and all they'd have in position is the stock they shorted against them. So they can buy stock back, especially if it's below strike.

Ergo, we have the forces that lead to a pin. "Natural" stock shorting above strike versus the call holdings, and "natural" stock buying, if in fact the stock goes to or under the strike.

The caveats to all this are many.

Options are a zero sum game, so for every call long I just noted, there's a call short. In a different situation -- namely, a volatile stock or market -- it's the call short scrambling to protect his open-ended risk and chasing the stock away from strike.

There's also the fact that options are a relatively minor force and the pinning effect is easily trumped by actual news. Google (GOOG) this week is the perfect example. The Goldman-induced 20 pt. lift on Thursday through Friday easily swamped anything having to do with options.
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No positions in stocks mentioned.
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