Pin Risk (Options) Explained - Derivatives

PIN risk occurs when the underlying security of an option (e.g. the PIN number) is close to the exercise price of the option. In this situation the underlay is said to have struck or been "hit." It may be that the price of the subtenant develops disadvantageous, which leads to an unexpected loss for the author. The author can end up with a loss of profit and therefore cannot secure his position exactly. The risk for authors and sellers of options is that they cannot predict with certainty whether the option will be exercised or not. Option positions lead to a higher risk of loss than other options (e.g. high - risk, low - reward options). Sellers of option contracts often hedge their option contracts to create a delta-neutral portfolio. The aim is to minimise the risk of below-average price developments and at the same time implement the strategy that led to the sale of the option in the first place. In order to counteract the price changes of undervalued securities, the option seller can adjust its hedging position by buying or selling a certain part of it. This allows call-and-call sellers to hedge against the possibility of buying an underlier to create a delta-neutral portfolio. This allows the broker to charge the buyer a transaction fee for exercising the option to buy or sell an underwriter. The cost of options that buyers can exercise is not zero, but a percentage of their total trading volume. The cost of exercising the option varies from trader to trader, and the owner of the option can decide whether or not to exercise it if the cost is higher than the amount the options have in the money. Therefore, an option seller may not be able to predict whether or not an option is exercised. If the underlier price develops too high to perhaps eliminate the position on the next trading day, it may take an unexpected position in it and risk losing value. The trader sold a put option on shares of XYZ Corp., which were listed at $50 and expired on Saturday, October 20, 2012. The contract was traded on the last day, i.e. the option was $0.03 in money and the price of the contract at the time of expiration. Had the contract been so bad that it bought 100 XYZ shares at $50, the trader could have bought anywhere between 0 and 7,500 XYZ shares before putting the money into the deal. Instead, only 49% of the contracts were exercised, meaning that the trading partner (the insurer) would have had to buy 4,900 shares of the insurers. The trader bought 2600 shares to avoid XYZ gaining value, but kept 2600 shares short rather than flat as hoped. If his position in XYX shares was 7,500 shares, he would have held 2600 of these shares (briefly) for a total of 1,800 shares until the puts were exercised. In the case of US stock options, the day on which options on the US stock options exchange expire is Saturday (the third Friday of the month), and this is the Saturday of each month. On the days when an option expires, a trader can look for undervalued options to sell and trade "undervalued" by shifting the option from his money to a no-money option and keeping the options flat until the expiration. For example, five minutes before the close of trading, this trader has a short position in IBM shares at $89.75, but IBM's share price is now $89. 75 after the five-minute trading close. With two minutes to go before the close of trading, IBM's share price suddenly moves to $90.26, and so the call at that price is running out. The call is no longer in the money, so it will expire at that price, even if it has been shortened. Thirty seconds before the close of trading, IBM is down to $89.95, and the options are now in the money. The trader will now wish to exercise the option, but must first sell 1,000 IBM shares at $90.26. To keep IBM shares flat through the deadline, traders must do so at the same price as the call or at a lower price than the expiration date. The call is now in the money and the trader must buy back the stock quickly, but not before the deadline. Options traders can exploit a stock's tie to a particular strike, and their broader options portfolio may be busy on Friday. As mentioned above, stocks can erupt and call strikes, so traders need to keep a close eye on their positions. One option is to sell a call that exceeds a set value, and another may call a strike, but not before the deadline. In some markets, the base price that determines whether an option is automatically exercised is the price reported to the Options Clearing Corporation (OCC). The price for the regular after-hour clock is reported via the options market and reported by the OCCC. In some cases, trading may have taken place before the option's expiry date, but not at the time of trading. The O CC will announce this price in advance to give the exchange time to correct the error. This can be of any size and come from any participating exchange, such as the New York Stock Exchange or the US Federal Reserve.