Leave Pinnning To the Bowling Alley

• Posted by Adam Warner
• on January 18th, 2010

For a variety of reasons, playing for pins, or even just worrying too much about them, is a waste of time. Yes they happen, but it’s not like there’s some gigantic Vampire Squid pushing and pulling each stock to a price they find desirable. Even if such a Vampire Squid existed, we wouldn’t know what price they want everything. Yes you can look at open interest, but it’s not the be all and end all and it doesn’t attract a name from 3 strikes away.

But here’s my advice anyway.

If you want to play for pins, it really pays to wait until late in the week. You give up the added premium from earlier, but you make up for it by saving yourself from the often erroneous assumption that everything’s going to sit right where you see it on Monday or Tuesday. GOOG didn’t exactly look like 580 when it was trading at 602.

And assuming you wait, use disciplined stops. If you sell a straddle and it flies away from strike, just cover, don’t turn your small loss into a big one. Expiration works two ways. If options shorts are working, options longs are forced to either sell their long paper or attempt to flip stock around strike. That’s what (sometimes) causes a pin. But if options longs are working and the stock moves away from strike, options shorts need to scramble and trade in the direction of the trend and away from strike. And don’t forget that options short risk is really open ended, so it can really get going away from strike.

Best advice again is to just not bother. Between $1 wide strikes and so many moving parts in the market these days in the form of ETF’s and inverse ETF’s and what not, seems like pinning is just not as prevalent. Look at this expiration, we could not have had more pathetic volatility going in, yet it seemed like relatively few names pinned. And those that did were not necessarily near a strike anyone was gaming.

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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