Get The Ticker Tape delivered right to your inbox.

X

Ask Trader Guy: What Does it Mean to Pin a Stock?

Print
July 1, 2012
Fredrik Broden

Q: Hey, Trader! What does it mean when a stock pins to a strike?

A: “Pinning” refers to a scenario where the price of a stock is right at, or a couple pennies away from, an option's strike price at expiration. “Pin risk” refers to a scenario where the stock price is “pinning” to the strike price of a short option position. When the stock is exactly at the strike price, you don't know if that short option is going to be assigned or not. If it is, you'll have short stock (if you have a short call), or long stock (if you have a short put), in your account the day after expiration. If the short option isn't assigned, you won't have any stock position. That uncertainty is “pin risk.” Some stocks do seem to pin to certain strikes at expiration, but you shouldn't count on it as a trading strategy.

Q: Hey, Trader! I've been trading option spreads in a smaller trading account, but I'm wondering if those same strategies can work in a larger account, like an IRA?

A: If you're seeing positive results in a smaller active trading account using various option strategies, you can certainly expand that to a larger account, except IRAs. Certain option strategies, no matter their size, can never be carried out in an IRA. For instance, naked short calls or short stock in an IRA are not allowed. Consider the amount of capital and your risk tolerance. The more capital you allocate to options and to advanced complex options strategies, the greater the risk. With a larger non-IRA account, where you may have long stocks, or funds, and bonds, you may only want to use a certain percent of your capital, say, 15% or 20%, to risk with option strategies, and leave the rest in money markets or T-bills. In this case, it's possible to get similar risk/ reward exposure as those long stock, fund, and bond positions with a smaller amount of capital using certain option-spread strategies. You may not want to add extra risk to your portfolio, so if you are thinking about taking some of the strategies you have used in smaller accounts to a larger account, consider using those option strategies as a way to allocate capital, not increase market exposure.

Q: Hey, Trader! I’ve heard some people refer to a position that is shorting an XYZ 50 call, and buying an XYZ 51 call, as “selling the XYZ 50/51 call spread,” and others referring to it as “selling the 51/50 call spread.” Who's right?

A: The convention among option traders is to work from the lowest strike to the highest strike. So, you can refer to the 50/51 call spread or the 50/51 put spread. Whether you're buying or selling the spread, the order of the strikes is the same and is understood by experienced traders. That is, if I tell you I'm short the 50/51 call spread, you would understand that to mean I'm short the 50 call and long the 51 call. Alternatively, I can say I'm long the 50/51 call spread, meaning I'm long the 50 call and short the 51 call.

Q: Hey Trader. I eat nachos while I trade, but my screens and keyboard get all greasy. My fingers slipped the other day and I nearly sent an order for 500 S&P futures! How can I clean it up?

A: Get a clean (no used napkins), lint-free cloth lightly dampened with water only and carefully dab and wipe away the offending nacho residue. Please, no sprays or abrasives! If that fails, have your dog lick it clean.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

NC
Scroll to Top