What’s “option pinning?”
In the video below I go over two examples of two stocks that “pinned” the option strike with the most open interest on options expiration.
Usually pin risk starts to happen the week of that months option expiration. During that week of expiration, there are conversions, unraveling and rolling of option positions that are in play by the bigger players.
The tendency of stocks “pinning” a certain strike, deals with the theory of “Max Pain” and what some think a self fulfilling prophecy. Max Pain, is the theory of the strike with the greatest open interest (calls + puts) is where most of the retail traders will be wrong.
Since most retail traders buy from a market maker, the market maker hedges the trade with stock, which is called “delta neutral“. When options come into expiration those market makers buy and sell stock to pin that strike and take in the premium sold.
With sticking to that same theory, many traders understand this theory like technical levels such as support and resistance. With many looking at the same thing, this becomes self fulfilling.
If you are looking for more information related to option trading, check out our “Basic Options Trading Tutorial”