Here’s a second educational article from Adam Warner at Daily Options Report. This one’s on options pinning. Note that Adam posted this at 6 am est. According to Yahoo, Google’s last trade was 390.00. – Ilene
Pinny Friday?
We noted on Monday that this was a likely week to see pins. Basically any time you get a declining volatility cycle, it’s time to expect pins.
Pinning is a "force" on a stock that causes it to gravitate towards a strike with high open interest. The thinking is that options owners will trade the stock and/or options tightly around the strike and cause a bit of a self-fulfilling prophecy.
In other words, they add so much liquidity around the strike that the stock, absent another force on it, will not budge. And in already non-volatile environment, that be THE force on it.
But there are pratfalls gaming pins too early.
Take this week as an example. We may still very well see lots of pins today, but not at the strikes that looked likely on Monday. How about GOOG here? If you had to guess Monday, 410, or even 420 looked like reasonable targets. There’s no big open interest on any line, but GOOG has a propensity to always pin somewhere.
If we stick anywhere now though, 390 looks like the spot thanks to the generally down week.
Which highlights another point. Pinning is *A* force, not THE force. Stock specific news, market moves, market volatility in general, et. al. all will trump a pinning inclination. Not only that, but there’s very little pinning pressure early in the week. Gamma and time decay increase exponentially over the course of the week, peaking at the close Friday when every option has either a 100 or 0 delta. So pinning plays Monday are just guesswork.
