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Henry Schwartz Analysis: Pinning and Moneyness in SPY

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Despite intense media attention on the government shutdown, trading in the options market was relatively quiet Monday. Roughly 7.7 million calls and 7.6 million puts traded across the exchanges, which is in-line with the recent daily average. Quarterly 168 puts on the SPDR 500 Trust (SPY) were the most actives. The contract expired nearly at-the-money and the activity yesterday offers a good example of two important concepts in options trading -- moneyness and pinning.

Quarterly options are unique contracts that expire at the end of each fiscal quarter. The contracts are available on a variety of popular tickers, including the "SPYders". Sep Quarterly contracts expired yesterday and, with SPY closing at $168.01, the 168-strike puts expired worthless. To understand why, let's consider the moneyness of the contract.

A 168-strike put offers the right to sell the underlying shares at $168 through the expiration. In this case, the last business day of September is the Sep Quarterly expiration and shares finished the day above $168. Therefore, the put contract is out-of-the-money because an investor can sell the underlying in the market for a price greater than the strike price of the options contract. There's no incentive to exercise the put when the shares can be sold in the market at a better price.

If the price of the underlying (SPY) is equal to the strike price of the options contract, the put is at-the-money and also expires worthless. An in-the-money put has a strike price higher than underlying share price. It has intrinsic value and will be automatically exercised/assigned at expiration, per OCC rules. Therefore, in terms of moneyness, at-the-money and out-of-the-money options expire worthless and in-the-money contracts have intrinsic value. They will be exercised at expiration, but can also be closed out or covered prior to the expiration through an offsetting or closing transaction.

Pinning happens when the share price moves very near the strike of an options contract at expiration. In popular names that have a lot of open interest, it can spur heavy volume in a specific options contact. Some investors scramble to cover positions amid uncertainty about whether the contract will expire ITM, ATM or OTM. Others might be selling premium to capture remaining time value in a contract before the expiration.

For instance, SPY hit a low of $167.15 Monday morning and, at that point, the 168 puts were $0.85 in-the-money. It rallied to $168.54 in afternoon trading and the 168 puts were $0.54 out-of-the-money. Shares then drifted back to $168.01 and the Sep Quarterly 168 puts expired worthless after trading in a range between $0.01 per contract to a high of $0.96. More than 287,000 contracts traded on the day.

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