Shake a Pin Feather

• Posted by Adam Warner
• on October 16th, 2009

Ever have those movies that when you catch them on you just can’t flip the channel? I would venture to guess I’ve seen some portion of Blues Brothers on 2130 separate occasions.

But is that so many? I’m guessing I have posted on pins twice that often. And guess what, here comes another one since it’s like an eternally hot topic.

Just for the nickel version, pin refers to when a stock expires right at a strike price. It’s a bit of an overstated occurence, though it’s real as stocks are about 10% more likely to close at a strike price on expiration than they are on a random day. Of course that number I quote is from a study before we had 1 pt. strikes all over the place, so in a sense, everything is in pin play now somewhere.

The non-nefarious reason stocks pin is that options owners on a strike price bracket the stock with ever-tightening orders on both sides so as to offset the options going to intrinsic value (or zero). The greater the open interest relative to typical volume, the more likely a stock will pin. Sort of. In an environment where volatility is lifting, high open interest could repel from strike as the options shorts are now scrambling. Fortunately, few of us are old enough to remember an increasing volatility environment, so table that last thought.

And yes, volatility is arguably the more important driver towards pins. A low volatility environment suggests a stock is not going to move much anyway, and having options longs trapped will only make it worse.

Now the caveats.

A *real* driver of a stock move will easily swamp a pin. High open interest will not mean much in the face of a pre-announcement or FDA approval or whatever.

And whether you believe pins happen by natural market forces or some cabal deciding where everything will close, the best advice is to look at the numbers and the market backdrop and not worry about the why.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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