Pin risk occurs when a stock closes very close to an option's strike price at expiration, creating uncertainty about whether the option will be exercised. This situation can lead to unexpected positions and weekend risk that catches traders off guard.
What is Pin Risk?
Pin risk refers to the uncertainty that arises when the underlying stock price is at or very near a strike price as options expire. The "pin" refers to how stock prices sometimes seem magnetically attracted to major strike prices on expiration day.
The problem: When a stock closes at exactly $100 and you are short the $100 call, you do not know if you will be assigned until after the market closes. This uncertainty can leave you with an unexpected stock position over the weekend.
Why Stocks Pin to Strikes
Market Maker Hedging
Market makers hold large options positions and hedge with stock. As expiration approaches, their hedging activity can push the stock toward heavily traded strike prices.
Maximum Pain Theory
The "max pain" price is where option buyers collectively lose the most money. Some traders believe stocks gravitate toward this price because it benefits options sellers and market makers.
Self-Fulfilling Prophecy
When traders expect pinning, they position accordingly, which can reinforce the tendency for stocks to pin.
The Mechanics of Pin Risk
Automatic Exercise Rules
The OCC (Options Clearing Corporation) automatically exercises options that are $0.01 or more in-the-money at expiration. However, option holders can submit contrary instructions:
- Exercise options that would not normally be auto-exercised
- Choose not to exercise options that are in-the-money
The Uncertainty Window
Exercise decisions can be submitted until 5:30 PM ET on expiration Friday, but the stock stops trading at 4:00 PM. After-hours news or price movements create uncertainty about final exercise decisions.
Pin Risk Timeline
4:00 PM ET: Stock market closes at $100.02
4:15 PM ET: After-hours trade moves stock to $99.95
5:30 PM ET: Exercise decision deadline
Monday: You discover if you were assigned
Real-World Pin Risk Scenarios
Scenario 1: Short Call Assignment
You sold a $50 call. The stock closes at $50.05. You expect assignment but the option holder chooses not to exercise. You end the week with no position, but had prepared for a short stock position.
Scenario 2: Unexpected Assignment
You sold a $50 put. The stock closes at $49.98, just barely in-the-money. You assume no assignment, but the option holder exercises anyway. Monday morning you own 100 shares you did not expect.
Scenario 3: Partial Assignment
You sold 10 contracts of the $50 call. The stock closes at $50.02. Some option holders exercise, some do not. You might be assigned on 6 contracts but not the other 4, leaving you partially hedged.
Who Faces Pin Risk?
Pin risk primarily affects short options positions:
- Short calls - risk of being assigned stock you must deliver
- Short puts - risk of being assigned stock you must buy
- Credit spreads - risk of being assigned on short leg while long leg expires worthless
- Iron condors and other complex positions with short options
Long options are different: If you own options, you control the exercise decision. Pin risk is primarily a concern for options sellers.
Managing Pin Risk
Close Positions Before Expiration
The simplest solution is to close at-risk positions before expiration day. Even if you pay a small debit to close a nearly worthless option, you eliminate uncertainty.
Roll to a Later Expiration
If you want to maintain a similar position, roll to the next expiration before pin risk becomes acute. This gives you more time and avoids expiration uncertainty.
Monitor Strike-to-Stock Distance
Keep track of how close the stock is to your short strikes as expiration approaches. If within $0.50-$1.00, consider closing or adjusting.
Have Capital Ready
If you choose to hold through expiration, ensure you have the buying power to handle potential assignment. Being assigned on a short put requires cash to buy the stock.
Spread-Specific Pin Risk
Credit Spreads
In a credit spread, your short option might get assigned while your long option expires worthless. This is called "being legged" and can result in an unhedged stock position.
Credit Spread Pin Risk Example
You have a $50/$52 call credit spread
Stock closes at $50.50
Short $50 call: Likely assigned (ITM)
Long $52 call: Expires worthless (OTM)
Result: Short 100 shares, no hedge
Iron Condors
With four legs, iron condors can face pin risk on either the call side or put side if the stock lands between the short and long strikes.
Options Expiration Types and Pin Risk
Weekly Options
More frequent expirations mean more pin risk events. Weekly options have become extremely popular but require careful management near expiration.
Monthly Options
Monthly expirations (third Friday) often have more open interest, potentially stronger pinning effects, and higher volume.
Quarterly Options
Index options and some equity options have quarterly expirations with significant open interest, making pinning more pronounced.
After-Hours Considerations
Even after the stock market closes, factors can affect exercise decisions:
- After-hours trading in the underlying stock
- News releases that change stock value
- Corporate actions announced after hours
- Index rebalancing announcements
Track Your Options Positions
Pro Trader Dashboard helps you monitor options positions approaching expiration and manage pin risk effectively.
Pin Risk Best Practices
- Set alerts: Monitor stocks approaching your short strikes
- Close early: Do not wait until the last minute
- Know your account: Understand margin requirements for potential assignment
- Check corporate actions: Dividends and announcements can trigger exercise
- Have a plan: Know what you will do if assigned before expiration day
Summary
Pin risk is the uncertainty that arises when a stock closes near a strike price at expiration. Short options holders face potential assignment even when options appear barely in or out of the money. Managing pin risk requires monitoring positions closely, closing or rolling before expiration when appropriate, and maintaining sufficient capital for potential assignments. The best strategy is often to close at-risk positions before expiration day to eliminate uncertainty entirely.
Learn more about options expiration and credit spreads.