Chart of the Day – $AAPL A Case Study of Option Pins

by Enis January 18, 2013 10:22 am • Commentary

When I was an options market maker, I would dread January expiry.  It was a bookkeeping nightmare, since it was by far the largest expiry of the year, with hundreds (sometimes thousands) of options all expiring in my portfolio on the same day.  January expiry options are listed 2 years in advance (you can trade Jan15 options in many names as of today), so the options positions would build up over the course of that time.  Once expiry day finally came, I had myriad residual positions to watch and clear.

As a result, my anecdotal experience was that Jan expiry would lead stocks to “pin” important strikes more often than usual.  (For a brief primer on pinning, read this post by CC from last year.)  Market participants would have larger than normal interest on particular strikes, and the mere act of re-adjusting their positions as the options expired would often lead to the stocks to pin those levels.

This week’s price action in AAPL is a classic example of that.  Here is the 5 day chart (with the $500 level highlighted in red):

 

Screen Shot 2013-01-18 at 10.12.31 AM

 

Notice how the $500 level has acted as a magnet over the course of the week.  The stock actually gapped right to it on Monday after closing at 520.30 last Friday.  Sure, there have been numerous headlines driving the stock up and down in the past week, but why does it keep converging on $500?  I would argue that both the actual effect of options expiration (the 500 strike has more than double the open interest of any other strike) and the anticipated potential pin by other traders causes the price to keep revisiting that level.

Lo and behold, AAPL has traded in a relatively tight range around $500 to start today.  This is a case where the options market is probably more important than regular stock traders realize.  We plan on doing more trades in anticipation of options pins for future expiries.