Pinning the Strike

Posted in Finance, Accounting and Economics Terms, Total Reads: 480
Advertisements

Definition: Pinning the Strike

Pinning the Strike is the phenomenon of a stock closing at a price near the strike price of the stock’s option that is being traded on the derivatives market.

 

Description and Example:

When an option of a stock witnesses heavy open interest and when its expiry nears, the corresponding stock’s price in the regular market tends to “pin” to the strike price. Open Interest is the number of option contracts that are outstanding (open) at any given point of time. Usually, higher the open interest, more is the liquidity and tradability of the option.

 

An option’s open interest tends to be high when it trades “at the money”. This means that the stock is trading near the strike price and this leads to heavy uncertainty around the direction in which the stock price would move (it can close above or below the strike price). In such a case, investors tend to avoid exposure to the underlying stock and hedge the risk by selling the stock when stock price moves above the strike price, and buying the stock when its price goes below the strike price. Such heavy buying and selling around the strike price leads to the stock closing near the strike price itself. This is termed as “Pinning the Strike”.

 


Advertisements



Looking for Similar Definitions & Concepts, Search Business Concepts