Historical Case Studies of Major Pinning Events

Learning from the Past

One of the best ways to understand the dangers of pin risk is to study historical examples of major pinning events. By examining these events, we can see how pin risk can play out in the real world, and we can learn valuable lessons about how to avoid becoming a victim.

The Case of Apple (AAPL)

In May 2012, Apple (AAPL) was the subject of a major pinning event. The stock had been trading in a range for several weeks, and there was a large open interest in the $580 strike options. On expiration Friday, the stock traded in a very tight range around $580 all day. In the final minutes of trading, there was a massive surge of volume, and the stock closed at exactly $580.00.

This was a classic example of a gamma trap. The market makers had a large position in the $580 strike options, and their hedging activity kept the stock pinned to that price. For traders who were short the $580 straddle (a combination of a short call and a short put), it was a dream come true. The stock had not moved, and their options expired worthless.

But for traders who were long the straddle, it was a nightmare. They had paid a large premium for the options, and they had lost it all. This event was a effective reminder of the influence that market makers can have on the price of a stock around expiration.

The Case of the Triple Witching Hour

The "triple witching hour" is the last hour of trading on the third Friday of March, June, September, and December. This is the time when stock index futures, stock index options, and stock options all expire on the same day. This can create a perfect storm of volatility and pin risk.

In the triple witching hour of September 2015, there was a major pinning event in the S&P 500 index (SPX). The index had been trading in a narrow range all day, and there was a massive open interest in the 1950 strike options. In the final minutes of trading, the index was pinned to 1950, and a huge amount of volume was traded at that price.

This event was a clear demonstration of the power of the "pin." The large open interest at the 1950 strike created a effective gravitational force that pulled the index to that price. For traders who were prepared for this, it was a great opportunity to profit. But for those who were caught off guard, it was a painful and expensive lesson.

Lessons Learned

These are just two examples of the many pinning events that have occurred throughout history. By studying these events, we can learn several important lessons:

• Be aware of the open interest. A large open interest at a particular strike price is a red flag for pin risk.
• Be wary of the triple witching hour. This is a time of increased volatility and pin risk.
• Don't fight the pin. If you see a stock being pinned to a particular strike price, don't try to fight it. The market makers have more firepower than you do.
• Have a plan. The best way to avoid becoming a victim of a pinning event is to have a clear plan for managing your positions as expiration approaches.

By learning from the past, we can be better prepared for the future. We can learn to recognize the warning signs of pin risk, and we can take steps to protect ourselves from its dangers.