This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Know Your Max Pain Level When it Comes to Options Expiration

However, I believe that most of the time pinning is actually due to the market mechanics of buying and selling options. When calls or puts are purchased, there has to be a seller. Most of the time the seller is likely a market maker. Selling those options carries risk to the market maker and in order to hedge that risk they either sell short or buy the stock outright in order to maintain a delta-neutral position.

To put it another way, market makers will adjust their position of the underlying stock they are selling an option for in order to have zero risk no matter which way the stock goes. As the stock fluctuates in price the market maker will continue to sell short or buy more stock to remain neutral. As expiration approaches and options begin closing out in higher frequency the market makers' rebalancing (buying and selling of the stock) pressures the stock to a certain price point or "pins" the stock.

The higher the open interest on a stock, the larger the volume of stock the market maker hedges with and the greater odds of pressure being put on the stock on expiration day. Hence, the higher-beta, more-liquid momentum stocks are more prone to pin on expiration day. The most frequent type of pinning you will see is a stock closing where the most amount of options expire worthless (as opposed to where the greatest dollar amount expires worthless as mentioned above).

How You Can Benefit: Looking at the open interest throughout the week, especially on Friday morning, can help you determine where a stock might pin. If you know where a stock has odds of pinning you can use that to make winning trades.

Using the above example, when TWTR popped to $46.55 the first half hour of Friday morning you could have purchased TWTR puts, sold TWTR calls or shorted TWTR stock under the presumption that it would close near $45 as it did. 

It's true that the calls and puts of a stock that trade on expiration day can shift the open interest and thus, anticipating where it will pin has its limitations. Stocks don't always pin and often other factors will play a larger role in where a stock closes on expiration day. These factors include earnings releases, news events, large volume based on accumulation or distribution of a stock, and the overall market conditions. However, after over two years of following the open interest on high-momentum stocks I have seen this type of pinning more times than not. 

To learn more about options pinning, please visit the education section of my Web site. 

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.19 -1.04%
FB $118.06 0.54%
GOOG $695.70 0.48%
TSLA $222.56 -4.20%
YHOO $36.00 -0.03%


Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs