Expiration

This past Friday, the 18th of June, was options expiration. Actually, to be technically correct, the options expired Saturday the 19th but the last day to trade those options was Friday.

A phenomena occurred Friday that I want to discuss. This phenomena is called "pinning." Pinning occurs when a stocks price is driven to a specific options strike price. The reason for this is to drive out the value of all long holders of calls and puts at that specific strike price. The corollary to this is that if you are short calls and puts at this strike you will be able to cover for nominal amounts prior to close or let the options expire worthless. Naked shorting of calls and puts is a tricky and sometimes dangerous game but if you are observant of pinning you can take advantage of this phenomena and reap the rewards.

An example of pinning from this past Friday is Google. GOOG closed at $500.03 on Friday after opening at $502.51 and trading to a high of $503.47 and a low of $498.13. If you were short the $500 strike calls and puts of GOOG you were able to close those shorts in the waning minutes of the day for $.10 to $.15 a contract. These calls and puts, just the day prior, were trading for $2.50 and $3.00. That is the difference to be made, per contract, if you were aware of GOOG being driven to $500 strike and were taking advantage of it. I think that the institutions try to pin frequently but other market participants contribute volume that they cannot make up for or mitigate. It happens enough though and is so profitable that it will contribute handsomely to your trading profits if you can take advantage of it.