Trading to take advantage of price pinning

[jr1221 12]

Kim has posted and tweeted in the past when obvious examples of price pinning has occured.  As most of us know, it is not unusual for the big players and market makers to pin the price of stock in order to cause as many options contracts (on both call and put side) to expire worthless, maximizing profits to those who wrote the options.  If you look at GLD, it seemed likely yesterday that it would close today somewhere in the 115 range, based on the open interest on both sides of the December expiries. Sure enough, the stock hovered around 115 all day yesterday and all day today, despite its recent volatility.  Had you bought a Jan/Dec 115 call calendar early yesterday, you'd have paid about 1.50 and you could've sold it late in today's session for about 2.00.  

 

Of course the risk is that we're dealing with trades right up to expiration, which we know is not favored in this forum.  However, with the knowledge that price pinning occurs and evidence when it is occurring, I wonder if that makes them reasonably high probability trades that could be done with smaller than average positions.  

 

Kim has pointed out price pinning on many occasions, and it tends to play out with high consistency.  Would we dare play it with a calendar over a 1-2 day period?  You could even do it as a same day trade, open early in the session and let the theta run out of the short leg throughout the day.  

[Hany 1]

Hi Jr.  Thanks for comments.  I think a day trade with an Iron Condor would be a really good trade on expiration day (instead of calendar two days out).  What do you think?  What other symbols other than GLD show pinning behavior?  Before they had a price split, AAPL and GOOG used to pin regularly at expiration.

[jr1221 12]

My concern with Iron Condor was that all the legs expire within 1-2 days, so either the credit will be too small to be worthwhile or else the risk too high, not to mention commission costs due to so many legs.  I liked the calendar because the long position is a month out, providing less risk.  I may do a little backtesting to see if these trades work.  Would be curious if Kim has any thoughts on the concept of the "pinning trade".  

[Yowster 9,849]

The calendar based on pinning where the short leg expires in a few days can certainly work, IF you pick the correct strike price.  The main risk here is with such a short-term calendar you can't afford that much stock price movement - and when you open the trade 3-4 days before expiration the price at which the stock may ultimately pin is not necessarily the one you think its going to be.  I read a book a while ago called "Trading Options at Expiration" by Jeff Augen (which is a great read regarding option price behavior the last few days prior to expiration).  The trades he likes in these scenarios are ratio spreads where you are long ATM strikes but short a greater number of OTM strikes (calls and/or puts), with the thought being that the OTM options will lose value quicker than the ATM ones.  The risk here is that a large price move in the wrong direction can hurt your trade and also the uncovered shorts require a lot of margin.  I've had some success with a similar concept trade which is kind of a modified butterfly where I am long one ATM strike, short 3 OTM strikes and long 2 further OTM strikes (a butterfly with one upper wing and two lower wings).  A large price move beyond your short leg strike will hurt this trade but at least your loss is capped.  Ideally, with a trade like this you would open it for a credit and also be able to close it for another credit.  This type of trade is not a sure thing, but if you hit the pinned strike with your short leg then it can work well.

[Optrader 142]

Problem with such strategies is high gamma risk. 

profits can vanish fast. And if you start locking profits at say 10%, then the risk / reward ratio becomes poor as sometimes you can loose 100% eg. chipotle. If you had a  butterfly or calendar, it could have been blown out today. 

 

Anything close to expiration is high risk / high reward /high frequency. 

May need a computerized system like Jeff Augen to deal with such kind of trades. Humanly could be tough, unless you are day trader and can watch market every minute.