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.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
Up Next
What is a strike price? Strike prices are used in conjunction with options. Calls and puts give investors the right to buy or sell stocks at predet...
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...