Early Pim Jamming

• Posted by Adam Warner
• on November 18th, 2009

There are two main drivers to a stock pinning at strike on Expiraiton Friday. One is the open interest of the given strike. The higher the open interest, the more likely the stock gets drawn to strike because owners of the options will likely engage in transactions that have the net effect of foricing the stock there (typically we’re talking about call owners selling stock against them as the calls are set to become stock themselves), The other is the general volatility backdrop in both the stock itself and the market. The lower the volatility, the more likely a stock can’t escape a strike price as the force from the open interest takes on greater relative importance.

And we are sitting in a VERY low volatility backdrop right now. Even with no expiration, it’s likely that the stock prices you see now will closely resemble prices you will see on Friday. If those prices happen to be near strikes, then voila, we have a pin.

But still, remain careful. Take a name like BIDU. It spent about the entirety of Tuesday within spitting distance of 440. But the open interest in the calls is a mere 3700, with 700 on the puts. Even compared to low volume in the stock itself, that’s not much of a force there. BIDU may sit just because the market’s not doing much, but that’s more a case of coincidence than actual pinning.

RIMM’s another name to watch, but this one at least has some open interest. Combined calls and puts add up to about 65,000 on the 60 line.

Moving along to other horsemen, we have AMZN near 130. Open interest is 20,000 combined though, about 2/3 the “pull” of RIMM when you adjust for price and voume levels.

AAPL you ask? The big ticket there is the Nov. 210 calls, with 55K, while puts on that line add another 10K. Here’s my issue with that one though. AAPL has not traded at or near 210 yet, so a move towards there is just as likely to freak the options shorts into chasing as it is the options longs into fading. Whatever pain the options longs have experienced has already happened as this is only a 70 cent option.

Remember always with all these that pins are only a force ON THE MARGINS. Real company specific or market-shaking news will easily trump pin tendencies. It’s only when there’s literally nothing else going on that we should focus much on pins. And there’s nothing going on now.

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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