Pin Risk

Pin Risk is the particular brand of headache that an Option Writer (the seller) can suffer when the price of an Underlying Asset finishes on Expiration Date almost exactly at an Option's Strike Price. This knife-edge situation creates major uncertainty for the writer, who is left guessing whether the option will be exercised or not. The option's price is “pinned” to the strike, and the writer is pinned in a state of suspense. They go home for the weekend unsure if they will be forced to buy or sell the underlying stock, leaving them exposed to any price gaps when the market reopens. This uncertainty is the core of pin risk—a nasty surprise that can wreck an otherwise solid strategy.

When you write (sell) an option, you take on an obligation. If you write a Call Option, you're obliged to sell the stock at the strike price if the buyer chooses to exercise. If you write a Put Option, you're obliged to buy it. This process of being forced to make good on your obligation is called Assignment. The problem arises because you, the writer, have no control over the exercise decision—that power belongs entirely to the option holder.

• If the option is clearly in-the-money (ITM): You can be almost certain you'll be assigned. For example, if the stock is at $55 and your call option strike is $50, the holder will exercise to buy the stock from you at a discount. You can plan for this.
• If the option is clearly out-of-the-money (OTM): You can be confident it will expire worthless and you'll keep the premium. For example, if the stock is at $45 and the call strike is $50, nobody will exercise.
• If the option is at-the-money (ATM) or very close: This is the danger zone. The holder might exercise, or they might not. A tiny, last-second price flicker can change everything. You are left completely in the dark about your portfolio's state.

This uncertainty prevents you from managing your risk effectively. You don't know whether you need to implement a Hedging strategy because you don't know what your position will be on Monday morning.

Imagine you're a long-term investor in Apple (AAPL) and own 100 shares. To generate a little extra income, you decide to use a Covered Call strategy, selling one call option with a strike price of $175 that expires this Friday. As the market is about to close on Friday, AAPL stock is hovering at $175.02. What happens now?

1. Scenario 1: You are assigned. The option holder exercises their right to buy your 100 shares for $175 each. You sold your shares and received $17,500. Over the weekend, news breaks that a competitor has failed, and Apple stock gaps up to $190 on Monday. Because you were assigned, you missed out on $1,500 of gains.
2. Scenario 2: You are not assigned. Perhaps the holder's commission costs were higher than the tiny 2-cent-per-share profit, so they let the option expire. You keep your 100 shares. Over the weekend, a negative regulatory ruling is announced, and Apple stock plummets to $160 on Monday. You're now sitting on a $1,500 loss you would have avoided if you had been assigned.

In both cases, pin risk put you in a reactive, helpless position where market events over the weekend could significantly impact your wealth.

Value investors cherish certainty and control; pin risk is the enemy of both. It drags you away from analysing a business's long-term fundamentals and into the chaotic world of last-minute price speculation.

If you use options as part of your investment toolkit, the key is to be proactive, not passive.

• Close the Position Before Expiration: This is the simplest and most effective solution. Simply buy back the option you sold, even if it costs a few dollars. This cancels your obligation entirely. The small cost is the price you pay for a stress-free weekend.
• Roll the Position: You can close your current near-term option and open a new one with a later expiration date and/or a different strike price. This allows you to continue the strategy while sidestepping the immediate pin risk.
• Favour Cash-settled Options: Some index options (like those based on the S&P 500 Index) are cash-settled. This means no actual shares change hands. If you are assigned, the cash difference is simply debited or credited to your account. This eliminates the specific risk of being stuck with an unwanted stock position but does not eliminate all expiration-day risk.

Ultimately, the best defence is to remember that as a value investor, your edge comes from understanding businesses, not from gambling on hundredth-of-a-second price moves. Don't let a clever strategy get wrecked by a preventable, pin-prick of a risk.