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Expiration Has Options Traders on Pins and Needles

AOL and Microsoft are under the weather as May options wither.
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Expiration Friday was short on volatility but long on anxiety as traders tracked the high-volume listings that could be subject to late-day pressure.

They were watching out for potential "pins," or stocks that finish the day just shy or right at the strike price with the deepest open interest.

Pinning is an expiration-day phenomenon in which stocks that are heavy options favorites -- like


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-- are subject to volatility based on hedging and other trading patterns associated with options expiration.

For example,



was hovering near its May 150 call strike this afternoon, down 2 to 149 1/2.



too was sticking close to its May 25 calls, down 3/8 at 25 1/8.

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"I can't remember an expiration day this quiet," said Gary Semeraro, options pro at

S.G. Cowen

. "It's as if everybody is waiting for something to happen."

Indeed, the pin activity in several options favorites was apparent because institutional trading was thin. Usually, any large order will blow through the pinning patterns a stock may experience, leaving market makers scrambling in its wake. In light action, the Dow was down about 40 at midafternoon.

That doesn't mean the day was dull, however. The pinning situations can get sticky for market makers as they try to unwind positions by buying back call contracts and selling shares, usually at a ratio of two calls to every share, said Rod Jamieson, options strategist for

Everen Securities

. "Usually pinning just involves a half a buck on either side of the strike price," he added.



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, rumored yesterday to be pin-pressure candidates, were dropping today, possibly as specialists tried to keep the stock prices away from the option strikes with heavier open interest.

AOL was above 130 at its open this morning, and that could be bad news for market makers if they are short a large portion of the massive 13,925-contract open interest. If AOL closes above 130 today, market makers would have to buy all their call contracts back or pay up for the shares to fulfill their short option obligations.

Late Thursday, a Chicago trader said AOL had been "hit" and was likely to get pinned to the 130 strike. Today as the stock burned off a few more bucks -- it was down 3 5/16 to 126 3/16 at noon -- that seemed less likely.

One AOL trader said the floors were short many of the May 125 calls, which had open interest of only 7,000 contracts, and long the May 130s. "It may get pinned at either price," said one AOL trader.

The open interest in the May 125 options, both the puts and calls, was over 22,000 and the natural hedging that was going on today was likely to keep the stock around that price, said one New York trader.

Yet AOL trading wasn't volatile. One trader said the traffic came from institutions selling June options at relatively inexpensive levels. "By doing this, they're essentially saying that they're not expecting AOL to move much in June," the trader said. "If investors were looking for an inexpensive play in AOL, the June options would be the way to get it."

A similar scenario looked to be developing in Microsoft's options at either 75 or 80. In the May 80 calls, open interest was 24,734, a situation that could force instituitions to either buy back their call contracts or be on the hook for almost 2.5 million shares of the stock later this afternoon.

Microsoft's stock was under pressure this afternoon after climbing to 79 at the open; it was down 1 1/16 to 77 3/8. "I'm not sure if the pin risk could be enough to push the stock down to 77, but at 80 or 81 I'm sure these guys would be taking action," said Everen's Jamieson.