I wanted to talk to you today about what is known in the options world as “pin risk”.  It’s not something that comes up often in our live signal room but it is a concept you need to be aware of.   “Pin risk” is the risk that an options trader has when an expiring options contract expires at or very near the strike.  If you are long an option at the strike, pin risk is very easy to deal with.  If you settle below the strike, simply do nothing.  If you settle above the strike you exercise as many options contracts as you are able to sell in the underlying contract above the strike. 

For example, let’s say I was long 10 FB 110 calls expiring today.  FB is trading $110.00 presently.  At the close if we are below the strike, I do nothing.  At the strike (FB=$110.00) I do nothing.  And let’s say that FB jumps to $110.10.  I have control over 1,000 shares of FB with my 10 call options.  So, I can sell up to 1,000 shares above the strike and then exercise our long calls.  I will have a flat position come expiration and I will have netted $100.00 (1,000*$0.10) on the trade.  But here’s the tricky part.  What if I were the person who was short the call?  Below the strike, I most likely do nothing as my long counterparty will probably not exercise his/her right to buy FB at $110.  Above the strike I probably have buy some stock.  I can assume that I will be assigned on at least some of (probably all) of my calls. 

At the strike, who knows?  That’s the risk.  If FB expires exactly at $110.00 how many contracts that I am short will be assigned to me?  There’s no way of knowing and that is the undue risk you do not want to mess with.  You would be simply be guessing.  Guessing and hoping has no place in anyone’s trading methodology and risk management.  The prudent thing to do would be to get rid of that risk by simply buying back the short call and be done with it and move on to the next opportunity.