Pinning the Strike

It’s Friday afternoon, and all over town, people are getting ready to kick off their weekend. Some folks are making dinner plans, some are getting all gussied up for a night at the club, and some, like us, are feverishly watching the price of our favorite securities as the markets get closer to closing.

Why so feverish? Because we’re looking for a phenomenon called “pinning the strike,” which is when the closing price of a security is really, really close to its strike price. This tends to happen when there’s a lot of open interest in the stock’s near-the-money options that are about to expire.

Let’s say a grocery chain called Food for Bellies, Inc.’s stock is trading at about $41.25 per share. Now let’s say there are a bunch of $41 puts and calls out there that are about to expire. As we get closer to market closing time, all those option holders are watching Food for Bellies’s stock price, trying to figure out if they need to buy or sell before that closing bell rings and their options expire. Depending on whether they’re long or short, and whether we’re talking puts or calls, they’re going to buy and/or sell in an effort to keep that strike price close to the actual stock price. In other words, they’re pinning the strike price to the stock price. These guys are also really good at pinning tails to donkeys.