Understanding Pin Risk

Discussion in 'Options' started by LanceJ, Jul 20, 2020.

  1. LanceJ

    LanceJ

    I bought 10 KHC 35 strike calls that expire 7/17/20. The price closed on Friday at 35.01 I thought that option holders had to express their desire to the broker that they would want to execute before the end of expiration day if they finished In The Money and any options not 'sold to close' would expire worthless.
    I was wrong, OCC rules state that any options expiring in the money will be executed unless you specifically contact your broker 'Not To Execute'. (seems backwards)
    Monday morning, I was long 1000 shares KHC at 35 that I didn't want. Market price immediately moved to 34. I had the opportunity to gamble with losses that are way out of my risk parameters or lock in the $1000 loss. I sold the shares for a loss.
    I thought that pin risk was only associated with short options.
     
  2. donnap

    donnap

    Yeah, since the calls ended ITM; even by only a penny, you had to send contrary instructions to your broker that would say not to exercise the calls.

    As the holder, you can do this, depending on your broker's policies and cutoff times.

    The seller has no choice and cannot be sure whether he will be assigned or not.
     
  3. FSU

    FSU

    Pin risk really does only apply to your short options, as you have the ability not to exercise your long options if they are in the money. With short options you don't know what will happen for sure.
     
  4. .sigma

    .sigma

    wait, if he bought the 35 calls, isn’t 35.01 OTM?

    Also, why did the OP go long the shares if we wasn’t obligated?
     
  5. donnap

    donnap

    The calls auto-exercised because they were .01 ITM.

    OP had to send instructions to his broker to avoid this.
     
  6. donnap

    donnap

    Years ago, the threshold for auto-exercise was .75 ITM (I believe)because many brokers had high fees for exercise.

    It wasn't worth it to many traders to exercise under .75 ITM. Free money for the MMs.

    IB had no exercise fees, so several times I had to send contra instructions to exercise an option less than .75 ITM.

    The threshold was lowered once or twice and finally down to .01 with lower costs or no cost for exercise becoming common.
     
    .sigma likes this.
  7. .sigma

    .sigma

    isnt 35.01 out of the money if he bought the 35 calls? It would be ITM if it was the 35 put BOT

    edit: just saw your post..

    So if your strike is ITM and you BOUGHT the call your broker automatically exercises your option? I thought the buyer had the “right” not the “obligation”
     
    LanceJ likes this.
  8. donnap

    donnap

    With the 35 calls, he has the right to buy at 35.

    So the calls were worth .01 or .01 ITM.
     
    davidtuan likes this.
  9. davidtuan

    davidtuan

    Very well, I think so too
     
  10. LanceJ

    LanceJ

    Not the Broker, OCC rules. You have to tell the broker not to exercise. Seems backwards to me too.
     
    #10     Jul 22, 2020