Pinning Apple - a bit of day trade fun on a Friday

[TrustyJules]

What drew me to this site was Kim professing to apply strategies or trading philosophies as set out in Jeff Augen's books. Besides many things posted on here he also devoted some chapters to stock pinning, i.e. on expiration some stocks tend to gravitate towards a particular strike price. AAPL was and is an example of a stock that often pins to a strike. Jeff did his research on 3rd Friday expiries but I thought to test his theory today for a bit of fun. The actual pinning effect is something I verified by charting minute by minute quotes for AAPL over two years. You get charts like these:

 

 

Here you see the stock quote from March last year with the Y axis showing how far ($) away from the closest option strike the stock was and the X axis the number of minutes since trading started that day. This plunging chart is very frequent with AAPL as - from the stocks I was able to acquire minute by minute data from - it is the stock that most consistently shows this behaviour - it only failed twice in two years roughly (based on 3rd Friday expiries).

Anyway I could never make use of this with my European broker because profits are small and trading is frequent - with minimum 36$ to open and close a position this wasnt feasible. Now I switched to a US broker this became a possibility. So for fun I tried this today on a non 3rd Friday expiry and I can say AAPL duly obliged:

 

I picked up the trading at 11.40 AM EST - you can start earlier but this is usually a midday lull that creates a stable time to open your position. The strategy is to use ratio trades to make profits on low capital investment. The stock was around 208.40$ and in line with the strategy we guessed that 207.50$ mark would be the close hence OB 1 C 205 @ 3.34$ and OS 4 C 202.50 @ 0.93$ for a net credit.

The stock duly obliged and tumbled; in fact below 207.50$ to 206.80$ or so by which time I closed the trade. Now we retained the theory that at close it would be 207.50 so this time we did a different ratio and sold the 2 C 202.50 @ 4.55$ and bought 4 C 205 @ 2.03 again for a net credit. AAPL proved particularly tractable and by 4.20 PM EST it was trading around 207.85$ so we closed. The 0.40$ credit on the 207.50$ calls beckoned again. Therefore we repeated the setup of the morning except this time of course the trade was a net debit.

I watched smugly as AAPL duly converged back down to the strike price - with 9 minutes till session close I was reckoning to close at the last minute. Except... my internet went down at that moment with 4 ITM shorts! Slight panic - router reboot and thank goodness Internet worked again (ouf!) I closed out immediately just in case another gremlin would be thrown up. In doing so I gave up a little profit as AAPL closed at 207.53 $ like a champ of pinning.

 

Profit from all this excitement: $ 362 after commissions - the capital outlay was never more than 2K (but this is a slight cheat because I have an AAPL long position in my portfolio) - anyway 18% in the day and a good bit of fun with a slightly unpleasant bit of excitement toward the end!

[Yowster]

18 hours ago, TrustyJules said:

What drew me to this site was Kim professing to apply strategies or trading philosophies as set out in Jeff Augen's books. Besides many things posted on here he also devoted some chapters to stock pinning, i.e. on expiration some stocks tend to gravitate towards a particular strike price. AAPL was and is an example of a stock that often pins to a strike. Jeff did his research on 3rd Friday expiries but I thought to test his theory today for a bit of fun. The actual pinning effect is something I verified by charting minute by minute quotes for AAPL over two years. You get charts like these:

 

 

Here you see the stock quote from March last year with the Y axis showing how far ($) away from the closest option strike the stock was and the X axis the number of minutes since trading started that day. This plunging chart is very frequent with AAPL as - from the stocks I was able to acquire minute by minute data from - it is the stock that most consistently shows this behaviour - it only failed twice in two years roughly (based on 3rd Friday expiries).

Anyway I could never make use of this with my European broker because profits are small and trading is frequent - with minimum 36$ to open and close a position this wasnt feasible. Now I switched to a US broker this became a possibility. So for fun I tried this today on a non 3rd Friday expiry and I can say AAPL duly obliged:

 

I picked up the trading at 11.40 AM EST - you can start earlier but this is usually a midday lull that creates a stable time to open your position. The strategy is to use ratio trades to make profits on low capital investment. The stock was around 208.40$ and in line with the strategy we guessed that 207.50$ mark would be the close hence OB 1 C 205 @ 3.34$ and OS 4 C 202.50 @ 0.93$ for a net credit.

The stock duly obliged and tumbled; in fact below 207.50$ to 206.80$ or so by which time I closed the trade. Now we retained the theory that at close it would be 207.50 so this time we did a different ratio and sold the 2 C 202.50 @ 4.55$ and bought 4 C 205 @ 2.03 again for a net credit. AAPL proved particularly tractable and by 4.20 PM EST it was trading around 207.85$ so we closed. The 0.40$ credit on the 207.50$ calls beckoned again. Therefore we repeated the setup of the morning except this time of course the trade was a net debit.

I watched smugly as AAPL duly converged back down to the strike price - with 9 minutes till session close I was reckoning to close at the last minute. Except... my internet went down at that moment with 4 ITM shorts! Slight panic - router reboot and thank goodness Internet worked again (ouf!) I closed out immediately just in case another gremlin would be thrown up. In doing so I gave up a little profit as AAPL closed at 207.53 $ like a champ of pinning.

 

Profit from all this excitement: $ 362 after commissions - the capital outlay was never more than 2K (but this is a slight cheat because I have an AAPL long position in my portfolio) - anyway 18% in the day and a good bit of fun with a slightly unpleasant bit of excitement toward the end!

Interesting read.  I've read Augen's stuff about pinning and option price at expiration, but I never tried to do a trade like this.  Thanks for posting it!   One comment regarding your opening position where you are long 1 205 call and short 4 207.5 calls - if you did not have the AAPL stock position to fully cover your 3 extra shorts then this trade would be very high margin to do.

[cuegis]

20 hours ago, TrustyJules said:

What drew me to this site was Kim professing to apply strategies or trading philosophies as set out in Jeff Augen's books. Besides many things posted on here he also devoted some chapters to stock pinning, i.e. on expiration some stocks tend to gravitate towards a particular strike price. AAPL was and is an example of a stock that often pins to a strike. Jeff did his research on 3rd Friday expiries but I thought to test his theory today for a bit of fun. The actual pinning effect is something I verified by charting minute by minute quotes for AAPL over two years. You get charts like these:

 

 

Here you see the stock quote from March last year with the Y axis showing how far ($) away from the closest option strike the stock was and the X axis the number of minutes since trading started that day. This plunging chart is very frequent with AAPL as - from the stocks I was able to acquire minute by minute data from - it is the stock that most consistently shows this behaviour - it only failed twice in two years roughly (based on 3rd Friday expiries).

Anyway I could never make use of this with my European broker because profits are small and trading is frequent - with minimum 36$ to open and close a position this wasnt feasible. Now I switched to a US broker this became a possibility. So for fun I tried this today on a non 3rd Friday expiry and I can say AAPL duly obliged:

 

I picked up the trading at 11.40 AM EST - you can start earlier but this is usually a midday lull that creates a stable time to open your position. The strategy is to use ratio trades to make profits on low capital investment. The stock was around 208.40$ and in line with the strategy we guessed that 207.50$ mark would be the close hence OB 1 C 205 @ 3.34$ and OS 4 C 202.50 @ 0.93$ for a net credit.

The stock duly obliged and tumbled; in fact below 207.50$ to 206.80$ or so by which time I closed the trade. Now we retained the theory that at close it would be 207.50 so this time we did a different ratio and sold the 2 C 202.50 @ 4.55$ and bought 4 C 205 @ 2.03 again for a net credit. AAPL proved particularly tractable and by 4.20 PM EST it was trading around 207.85$ so we closed. The 0.40$ credit on the 207.50$ calls beckoned again. Therefore we repeated the setup of the morning except this time of course the trade was a net debit.

I watched smugly as AAPL duly converged back down to the strike price - with 9 minutes till session close I was reckoning to close at the last minute. Except... my internet went down at that moment with 4 ITM shorts! Slight panic - router reboot and thank goodness Internet worked again (ouf!) I closed out immediately just in case another gremlin would be thrown up. In doing so I gave up a little profit as AAPL closed at 207.53 $ like a champ of pinning.

 

Profit from all this excitement: $ 362 after commissions - the capital outlay was never more than 2K (but this is a slight cheat because I have an AAPL long position in my portfolio) - anyway 18% in the day and a good bit of fun with a slightly unpleasant bit of excitement toward the end!

Very good. Also very interesting.

But, if you are going to make a habit out of this I would urge you to do everything in your power to have the most reliable internet connection you can.

I'm also curious as to how many strikes the stock tends to touch on expiration day.

Or, does it have a tendency to open near a strike, and then just get pulled to that one strike throughout the last day?

I'm trying to think of all the possible strategies you can use if you are working under this assumption.

If it touches several strikes, then whatever is the next strike, after the one that is closest, would probably be .05 cents, at the start of the day.

You could buy one in either direction, for a total of .10 - .20 cents, and whichever one it goes to will momentarily, have a value of maybe $1.00, depending what time of day it moves to it.

[RapperT]

Please keep up posted.  I tried this for a bit based on Augens’s writing but was not very successful. To be fair I gave up pretty quickly but I’m interested in your experience.

[TrustyJules]

@Yowster - as regards the margin - totally fair point which is why I mentioned it was 'a little bit of a cheat'.  In his books Augen recommend having long options deep in the money options to cover the margin. In my case I have a 3 C Jun19 215 in my long portfolio without which TastyWorks would have asked for about 12.5K margin for that position. That would reduce the daily overall return to 2.7% which still isn't bad. In his book Augen routinely mentions positions ten times this size which would be a different story altogether. On the other hand the C Aug10 210 were trading at 0.01$ so it would not be difficult or expensive to hedge this trade.

 

@Cuegis  Pinning behaviour has been extensively written about and is therefore something that one can rely on to a certain extent - it does not ALWAYS happen even for AAPL who in Augen's books and in the research I did myself over 2016/2017 proved to be the most reliable stock to pin. All optionable stocks show a tendency to pin but the largest and most liquid stocks have the highest likelihood of doing so. This is a good thing because for these small return strategies you need very fast execution and tiny spreads. The general idea is to have a delta neutral setups - Augen recommends long short ratios (like my first trade):

 

• 3:1 ratios long current month/week ITM and short ATM current month/week
• 2:1 ratios long next month/week ITM and short ATM current month/week
• 1:1 ratios long next month/week ATM and short ATM current month/week

What you make use of is the predictable collapse of implied volatility which during the last week is around 10%,13%,17%,26% on week days and 100% on Friday.The tricky part is of course to determine when this pinning behaviour starts. Augen professes it occurs already a week prior to expiry to a certain extent but as too many extraneous events may intervene I never examined this in detail. His main thrust of trades also start at close on Thursday as there is a huge IV collapse overnight that can be cashed through selling straddles for example or if the stock is not near the strike then you can buy straddles presuming it might contract on opening. Generally he indicates that by 11-12 EST you might presume that a stock will gravitate to the strike that is closest to the share price at that time if the stock shows good pinning behaviour in general (like AAPL).

Last Friday I did not track minute by minute and so I cant tell you how many crosses there were. In the expiry represented in the chart I included there were only 6 crosses all right at the end of the trading day. I also chart these for the March last year expiry:

 

Determining when there is a cross is also a little bit of a chore as much depends on how you define a cross (is it at any time or only if the stock ends below/above the strike etc...). In the chart I showed above AAPL never wavered from moving towards the strike - I have a companion chart that is a bit more complex:

 

This is how much the stock price moved minute to minute as a percentage of the step of the option strike (in this case 2.50$ strike steps). Small percentages like the ones in this chart are typical of the pinning behaviour with the stock moving in tight bounds always gravitating towards the strike. Only at the very end there is a slight easing and the stock slips a bit as presumably the unwinding of positions that is causing the pinning is done and the stock regains a little freedom. Friday was not a day like the one from the chart as the stock was much more mobile though it respected the notion that it was never more than 1.25$ away from 207.50$

 

Like I said, I havent got the minute by minute data but based on my recollection the movement of AAPL on Friday was more like the one of July 2017. Here are the charts for those:

 

That is as regards the crosses of which there were 33 in that July iteration. As regards stock price movement I guess the chart for Friday may look more like June 2017 with 13 crosses:

 

Sorry about the chart heaviness of the post - the thing is that I find it easier to visualise than to use tables as Augen does. My conclusion for AAPL was that indeed the 11-12 EST time is a good one for the safer bets regarding the pinning behaviour. The quiet midday lull is evident in the trading and truly AAPL rarely moves away from the closes strike after that (THIS IS NOT UNIVERSAL BEHAVIOUR NOR 100% TRUE FOR AAPL AT ALL TIMES). GOOGL and GS for example have far more crosses than AAPL and you are correct that this could be a strategy basis - I simply have not inquired into this far enough deciding after a while to concentrate on AAPL. In this case understanding one stock whilst developing the trade ideas was complex enough - GS and GOOGL also pin - but they move about differently and with more strike price crosses.

[RapperT]

Hey @TrustyJules did you trade this strategy this week?  If so how did it go?

[TrustyJules]

Yes I did - this post is not so glorious as the first - an expensive lesson but useful nonetheless. What I did is to go back to what Jeff Augen said - he claimed that by looking at the open interest you could see where things would be pinning roughly a week ahead. Essentially he proposed:

• selling straddles as of the Friday a week before expiry;
• closing that on Thursday before expiry or Friday morning of expiry;
• alternatively selling new straddles Thursday evening and closing in the first half hour
• doing a ratio trades as of the morning c.q. the midday lull and closing at the last minute.

In my defence for what follows I want to underline that it in my own analysis I had hitherto been unable to determine the strike of the pin before midday on Friday based on the minute by minute data I had examined. Nevertheless you cant learn if you do not experiment and so I proverbially 'went for it'. Admittedly by the time I was ready to act it was Tuesday so here is the blow by blow:

• TUESDAY - open interest was massively in favour of the 210 strike particularly in the puts
  • OS 5 C AUG17 210 @ 1.04$
  • OS  5 P AUG17 210 @ 1.28$
  • I hedged this with C 217.50/P.202.50 to avoid excessive margin pressure those cost 0.16$ together
• WEDNESDAY: this was the day the market tanked and to my surprise the AAPL stock held around 210$. I wasnt sure whether this could be realistically put down to pinning behaviour but seeing the straddle was showing a profit at the end of the day I stick with it. There wasnt a real piece of news that explained AAPL behaviour otherwise except that generally I think the market (and me) are bullish on AAPL.
• THURSDAY: Market recovers and AAPL rips upwards and Jeff's purported 'tell indicator' of the pinning strike moves to 212.50$ - I kept a close look on the OV and traded volumes and this move was quite consistent with AAPL moving upwards. Clearly the market moves their strikes even still on the Thursday. This was very evident on the calls less on the puts - by about 2PM my pain threshold for the straddles was reached as the stock traded just over 212.50$ and the OV in the 212.50 strike now exceeded the 210 strike. So I moved the straddle but not the hedges:
  • CB 5 C AUG17 210 @ 3.65$
  • CB  5 P AUG17 210 @ 0.10$
  • OS 5 C AUG17 212.50 @ 1.44$
  • OS 5 P AUG17 212.50 @ 0.43
  • My strategy was to close this either on Thursday evening if that made sense or Friday morning in the first half hour as per Jeff's recommendations. The stock meanwhile showed no tendency to stop at all it closed 213.48$ which put it quite close to a presumption of ending 215$ (Jeff purports pinning tends to go to the higher end) however after the roaring AAPL time it was equally reasonable to presume that the stock would drop on Friday. So I decided to wait and see.
• FRIDAY: The stock opened lower but that was only for a couple of minutes before it went up to 215$. Here is a moment where I probably acted too quickly. Again with a lag of a few hours the OV moves to the next strike without fail - its a lagging indicator not a leading one. I should have closed the straddle and waited for the midday lull. Instead I concluded that 215$ was going to be the pin for the day (at 9.45 AM) and constructed the strategy as a consequence and doing so overagressively:
  • CB 5 C AUG17 212.50 @ 2.44$
  • CB 5 P AUG17 212.50 @ 0.03
  • OB 4 C AUG17 212.50 @ 2.55$
  • OS 12 C AUG17 215 @ 0.60
• The problem with this move is that the stock really was still in full movement at that moment, it trended up right into midday to 217.31$. I sat still whilst this happened pondering that had not been a smart move. By 2 PM I figured that things had stabilised and that the position would need adapting again:
  • CB 12 C AUG17 215 @ 2.46 (ouch)
  • CS 5 C AUG17 217.50 @ 0.34$ (taking what little there was from the hedge)
  • OB 15 C AUG17 220 @ 0.02$ (new hedge)
  • OS 15 C AUG17 217.50 @ 0.29$ (unlucky there - just a little through as I set that up)
• From this moment on everything went more or less ok - except it turned out that its quite difficult to time your exit. The stock moved about A LOT and its clear different forces were being exerted on it. It closed perfectly pinned at 217.58$ and I had opportunity to close the open calls 217.50 for 0.11$ but as the seconds ticked away I closed around 15.58 at a bad time:
  • OS 15 C AUG17 217.50 @ 0.22$
  • CS 4 C AUG17 212.50 @ 5.15
  • Remaining hedges expiring worthless.
• I wanted to buy a straddle at that moment as Jeff indicates a pinned stock tends to make a big move on Monday, however when I put that through it seems that in the last minutes TW doesn't place the order  - I did put down the value of the mid of the straddle which is 4.30 for the AUG24 217.50 to be sold on Monday. As said I couldn't execute that however so that's a paper trade.

Conclusion: A big fat minus of $1740 including commissions. Although possibly closer analysis of the stock during the week would bear out differently I dont see how I could have predicted the pinning strike (using Jeff's suggestions) before midday Friday which is consistent with my previous experience in this respect. In Jeff's defence he does say that you should observe whether the stock seems to be pinning and with AAPL roaring through the week clearly that should have dissuaded me from trading before Friday 12 PM . The loss was exacerbated by moving too quickly in the morning of Friday and being too aggressive in the ratio - the losses on the straddles as a whole werent terribly awful and had the ratio been 3:1 or 2:1 even the 215$ OS calls would have been bearable. My main takeaways:

• pinning was evident and as of midday the stock - despite wobbling about was clearly going for 217.50 - it was perfectly feasible to trade during that period. Just dont expect to be selling 1$+ in premium - the buffering effect of the ratio is really quite useful (see the 212.50 long calls that compensated for at least part of the 215 ill advised ratio trade of the early morning;
• the trades should preferably be closed ahead of the last minutes - they are very hectic and it seems the broker doesnt always deliver in that period. Probably you need to put in a low GTC close - it will hit it but so fast that you cant input a trade yourself;
• with AAPL over 200 and the strikes 2.50 apart there is better room for manoeuvrer to set up pinning trades than before. When the strikes are 1$ apart its sometimes hard to find valid amounts of credit to sell
• I am going to go back to my minute to minute data and look at all Friday weekly expirations.
• Not discouraged by this outcome - you need to pay a little to gain understanding and though things were quite hectic at moments I am satisfied I closed the loss making positions and adapted without hesitation (the classic mistake would have been to hold on to the original straddle - the minus would have been in the order of 3K+). Strapping on the helmet and going straight back in was a mistake. To be continued.

[TrustyJules]

Just to conclude on the straddle - as you can see AAPL did make a big move but there was perhaps a minute in which you might have closed the straddle at a profit albeit a tiny one. For the rest it could easily have been closed for close to a wash. The stock behaved as expected but the pricing of the options was correct.