Option Pin Risk Near Expiry: Why Prices Gravitate to Strikes

Introduction

In the world of options trading, expiry day often brings unusual behaviour — especially when the underlying asset's price ends up hovering very close to one of the option strikes. This phenomenon is known as pin risk. It can create unexpected outcomes for both buyers and sellers of options. For retail traders in India, understanding pin risk is important for planning expiry-day positions, managing hedges and avoiding surprise assignments or unintended stock exposure. This article explains what pin risk is, why it happens (including the “strike magnet” effect), how it plays out on expiry day, and what practical steps you should take.

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What is Pin Risk?

Pin risk occurs when the price of the underlying asset (stock or index) closes at or very near the strike price of a large open interest option contract at expiry. In that case the option writer (seller) faces uncertainty about whether the option will be exercised — hence the position may convert into an unintended long or short position, or the seller may need to deliver shares (in case of physically settled stock options).
From the buyer’s side, even a small movement over the strike can mean the difference between finishing out-of-the-money (worthless) and in-the-money (ITM, exercised) — and that ambiguity affects hedging and risk planning.

Why Prices Gravitate to Strikes: The “Strike Magnet” Effect

Several market mechanisms contribute to pinning:
1. Open Interest concentrations at particular strikes: When many options at a given strike remain open near expiry, dealers, market-makers and hedgers may push the underlying’s price toward that strike to minimise hedging imbalances or reduce their net delta exposure.
2. Gamma, delta hedging dynamics: As expiry approaches, option gamma (rate of change of delta) increases near the strike. Market-makers hedging large positions may trade the underlying aggressively to keep gamma/delta neutral, potentially pulling price toward strike.
3. Unintended feedback loops: The combination of large open interest, hedging flows and last-minute trades (especially market-on-close or MOC orders) can push underlying prices into the strike zone. Some academic and practitioner pieces identify this as a “magnet strike” phenomenon.
As a result, you often observe the underlying drifting or “settling” around a heavily traded strike on expiry. This can create very tight trading ranges or last-minute moves.

How Pin Risk Plays Out on Expiry Day

For Option Sellers (Shorts)

1.The seller of an option near ATM (at-the-money) may not know if it will finish ITM or OTM until very close to expiry. If it becomes ITM by even a small amount, the seller can be assigned and forced into a long/short position in the underlying. The uncertainty complicates hedging.
2. If the underlying gaps unfavourably after the close (especially for stock options), the seller could face sudden losses because they may have unintended stock obligations or delta exposure.
3. For stock options, physical settlement adds another layer: the seller might be required to deliver shares or pay for shares they didn't expect to hold.

For Option Buyers (Longs)

1. Buyers have the right but not the obligation to exercise. If the underlying closes exactly at the strike, it may be unclear whether exercising makes sense economically (net of fees, taxes or delivery cost). The buyer’s decision or indecision influences assignment for sellers.
2. If the price moves just slightly either side of strike at close, it can shift a profitable position into a worthless one (or vice versa). A small move matters a lot.

Example Scenario

Suppose a stock has a call option with strike ₹500, and at expiry the stock trades at ₹499.90. Many contracts sit at the ₹500 strike. Because the price is so close, neither buyer nor seller is sure whether the option will finish ITM. Some buyers might decide to exercise; some might not. The seller cannot reliably hedge because the final outcome is uncertain — that constitutes pin risk. Later that evening or next morning a gap move to ₹505 can mean the seller now holds a short position at a worse price.

Key Indicators & What to Monitor

1. Open Interest (OI) by strike: Strikes with high OI near expiry are potential “pin” strikes.
2. Implied volatility and gamma exposure: Unusually large gamma or delta concentrations can flag hedging flows.
3. Underlying’s price relative to strike: The closer the price is to a major strike at expiry, the higher the pin risk.
4. MOC orders and expiration-day flows: In India, expiration day (especially for index options) tends to see heavy flows via settlement mechanisms; this may influence underlying price into the strike.

Practical Steps to Manage Pin Risk (for Retail Traders)

1. Close or roll options that are very near ATM as expiry approaches if you’re short and risk-averse. Reduces unexpected assignment risk.
2. Avoid holding large short positions near strikes with high open interest unless you are hedged and margin ready.
3. Monitor OI and strike concentration a day or two before expiry — identify strikes with very high OI, treat them as potential magnets.
4. Have hedges ready: If you expect the underlying may gravitate to a strike, consider buying or selling offsetting options or underlying stock to limit exposure.
5. Ensure margin and cash/shares availability especially for stock options — in India physical settlement means you might need shares or funds to meet the obligation.
6. Understand broker’s exercise/assignment rules: Auto-exercise thresholds, assignment notification times and settlement logistics matter.
7. Don’t assume price will stay away from a strike because “it’s unlikely” — the very fact of high OI and hedging flows makes pin outcomes more likely.

Why Pin Risk Matters for Indian F&O Traders

Retail traders who ignore pin risk may walk into unexpected obligations, margin calls or loss of capital unexpectedly. Since physical settlement rules apply for stock options, the consequences may include forced delivery or liquidation. By being aware of pin risk and the magnets created by large open interest, traders can better manage expiry-day exposures and avoid surprises.

Conclusion

Pin risk is one of the less-spoken but highly real hazards of options trading near expiries — especially when the underlying price is close to a strike with large open interest. The “magnet” effect and uncertainty around exercise/assignment can leave both sellers and buyers facing unintended stock positions or losses. For retail traders in India’s derivatives market, awareness and proactive management matter: close risky positions, monitor open interest, ensure margin readiness, and don’t assume the price will avoid a heavily contested strike. A small move on expiry day can dramatically change outcomes — don’t let pin risk catch you off guard.