Pin Risk On Expiration Day: Why A Defined Risk Spread Still Needs A Close
What pin risk means An option that finishes in the money at expiration is normally exercised automatically. One that finishes out of the money normally expires worthless. Pin risk is the gray zone between those two outcomes: the stock closes at, or within a few cents of, a short strike, and the seller of that option cannot know which way it will go. The decision is not the seller's to make. The holder of the option decides whether to exercise, and exercise notices are processed after the closing bell. A holder can act on an after-hours move or a news item the seller never sees. The seller finds out only when an assignment, or no assignment, appears in the account the next morning. Why a defined risk spread is still exposed An iron condor pairs each short option with a long option further out, and for the life of the trade that long option caps the loss. On expiration day that protection has a gap. If the stock finishes between the short strike and the long strike, the short leg is ...