3 ms·

Options and equites markets have a similar risk called pin risk where an underlying stocks price will tend to stick close to a strike price with alot of open in

Options and equites markets have a similar risk called pin risk where an underlying stocks price will tend to stick close to a strike price with alot of open interest. > Pinning refers to the potential for institutional option buyers to manipulate price action in the underlying as options expiration approaches. If these option buyers face the potential for a total loss of the option, they may try to pin the stock to a price just in the money by strategically entering buy orders at the last minute before the close https://www.investopedia.com/terms/p/pinrisk.asp https://www.investopedia.com/terms/p/pinrisk.asp You end up with this tail wagging the dog model where options end up moving the underlying as the option seller/writer doesn't know if they will be called on the option so they have to acquire it to hedge out their risk just in case. Similarly the option buyer doesn't know if they will be assigned so they tend to short the stock to, again, hedge out their risk so the stock experiences both buy and sell pressure around the strike price due to bets placed on it.

gruez 5y ago
>Similarly the option buyer doesn't know if they will be assigned Don't you mean option seller/writer? If you buy an option (and therefore are an owner), you have the right but not the obligation to exercise it. >You end up with this tail wagging the dog model where options end up moving the underlying as the option seller/writer doesn't know if they will be called on the option so they have to acquire it to hedge out their risk just in case. Right, but that's not any different than any other sort of leverage? eg. buying stocks on margin to drive up the price.
- chollida1 5y ago
  > Don't you mean option seller/writer? If you buy an option (and therefore are an owner), you have the right but not the obligation to exercise it. No, meant the buyer, alot of professionals want their exposure to be hedged out so they don't want to end up owning any shares after expiry so they need to be short shares for any calls that will end up in the money. So as an option pins the underlier close to the strike price the option holder ends up buy/selling to hedge out their delta exposure to zero. > Right, but that's not any different than any other sort of leverage? eg. buying stocks on margin to drive up the price. Not really, The tail waiving the dog effect occurs when a derivative instrument that is priced off an underlier actually ends up moving the underlier itself. Leverage is a different animal. If you lever up 2x you're just buying twice as much. When you unwind you you sell 2x as much. Its still the underlying moving itself and not being affected by any other instrument.

gruez 5y ago

>Similarly the option buyer doesn't know if they will be assigned Don't you mean option seller/writer? If you buy an option (and therefore are an owner), you have the right but not the obligation to exercise it. >You end up with this tail wagging the dog model where options end up moving the underlying as the option seller/writer doesn't know if they will be called on the option so they have to acquire it to hedge out their risk just in case. Right, but that's not any different than any other sort of leverage? eg. buying stocks on margin to drive up the price.

chollida1 5y ago
> Don't you mean option seller/writer? If you buy an option (and therefore are an owner), you have the right but not the obligation to exercise it. No, meant the buyer, alot of professionals want their exposure to be hedged out so they don't want to end up owning any shares after expiry so they need to be short shares for any calls that will end up in the money. So as an option pins the underlier close to the strike price the option holder ends up buy/selling to hedge out their delta exposure to zero. > Right, but that's not any different than any other sort of leverage? eg. buying stocks on margin to drive up the price. Not really, The tail waiving the dog effect occurs when a derivative instrument that is priced off an underlier actually ends up moving the underlier itself. Leverage is a different animal. If you lever up 2x you're just buying twice as much. When you unwind you you sell 2x as much. Its still the underlying moving itself and not being affected by any other instrument.