Pin Risk, and why it matters to Options Sellers

Pin risk occurs when the market price of the underlier of an option contract at the time of the contract’s expiration is close to the option’s strike price. In this situation, the underlier is said to have pinned. The risk to the writer (seller) of the option is that they cannot predict with certainty whether the option will be exercised or not. So the writer cannot hedge his position precisely and may end up with a loss or gain. There is a chance that the price of the underlier may move adversely, resulting in an unanticipated loss to the writer. In other words, an option position may result in a large, undesired risky position in the underlier immediately after expiration, regardless of the actions of the writer.

The right of the option holder has nothing to do with where the stock is versus the strike price at the closing balance expiration day. It has nothing to do with it. The option holder can exercise even if it’s not in their financial best interest to do so, and certainly prudent investors who hold options that are that close to the strike price will watch afterhours activity and see is this start to move. Undoubtedly, the cases that I get when I watch the time and sales, I’ll see. Well, yeah, it closed at the closing bell at $270 spot three, but then there was some pretty big after-hours activity. It was trading down in at the $269 handle during afterhours. And if you’re an investor holding a $270 put and you see that you’ll call your brokerage firm up and say, hey look I think I’d like to exercise my put option. I know where the stock expired, but after-hours activities going to lead that discussion. If that happens, then you can certainly be assigned on the flip side. You really want to be aware of that.

Example from reddit:
On Friday, I forgot to close my NEGG 30-35 call credit spread. I collected $1000 credit for it, NEGG closed at 30.50, so I could have closed it for net $500 profit, but I simply forgot to do it.

Needless to say, for several days now I’ve been having anxiety cranked to the max, unable to think about anything other than how ruined I will be if I get assigned and NEGG opens significantly higher on Monday.

Over the weekend, I found out I had indeed been assigned a thousand shares short, which could easily wipe me out if there were any significant gains over the weekend.

I placed a premarket order to buy back 1000 shares at 31 and it has now filled at 30.97, so I’m now clear.

I cannot begin to describe how relieved I am. This could very easily have ruined my life. I never ever want to ever go through this ever again.

Buy to close your spreads, no matter how far out of the money they are the day before expiry. Pin risk can and will get you eventually if you get complacent or just plain forgetful.