Influence of gamma
Pin pressure comes from “gamma traders” attempting to remain delta neutral. Since gamma (rate of change of delta for every $1 change in the stock price) increases as we get closer to expiration Friday traders tend to buy and sell many more shares of stock to stay delta neutral and ensure little to no risk.
- BCI Corp. is trading @ $50 per share
- The dealer (market maker) is long 100 x $50 calls which have a delta of .50 and a gamma of .14. This means that the delta will change by .14 for every $1 change in share price.
- The dealer is also long 100 x $50 puts which has a delta of (-) .50 and a gamma of .14. Once again, the delta will change by .14 for every $1 change in share price.
- The dealer is currently delta neutral: (100 calls x .50 delta) + (100 puts x (-) .50) = 0. (Take another sip!)
- If the stock moves up $1, the new delta position will be 28:
- (100 calls x .64) + (100 puts x (-) 36) = 28 (call and put delta move up by .14 )
- As a result of this $1 increase in share price, the dealer must sell 2800 shares of BCI Corp. to remain delta neutral
To roll or not to roll:
If your stock is trading just under the strike sold at we approach 4PM EST on expiration Friday and it meets the criteria for potential pinning consider rolling the call position if your decision is to keep this stock for the next contract cycle. The cost to close (time value) will be minimal ($0.5 – $0.10) as 4PM EST approaches on expiration Friday.
The evidence suggests that pinning is real and unique to high open interest options on expiration Friday. It is impacted by the hedging forces that are normal market forces used by institutional traders to eliminate risk from their portfolios.
Las Vegas seminar:
For those of you planning to attend my presentation at the Forex and Options Trading Expo at the Paris Hotel on September 14th, PLEASE be sure to introduce yourself to me and my team members. I’d love to meet you in person. Sign up for FREE using the link at the top of this page.
Friday’s disappointing jobs report left the door open for additional stimulative actions by the Fed perhaps as early as next week. Here are last week’s reports:
- The economy added 96,000 jobs in August below the 125,000 expected
- The unemployment rate dropped to 8.1% from 8.3% due to fewer people looking for work
- Manufacturing jobs dropped by 15,000 compared to an increase of 23,000 in July
- Productivity of nonfarm businesses rose by 2.2%, higher than the 1.9% anticipated
- Construction spending dropped by 0.9% in July despite expectations of an increase due to lower spending in home improvements
- There was growth, however, in singe and multi-family housing
- The ISM’s manufacturing index was reported @ 49.6 signaling contraction (above 50 reflects expansion)
- The ISM gauge for service-sector activity was expected to decline but actually rose to 53.7
For the week, the S&P 500 rose by 2.2% for a year-to-date return of 16.1%, including dividends.
A 6-month comparison chart of the CBOE Volatility Index (VIX or Investor Fear Gauge) and the S&P 500 paints a bullish picture although with significant short-term volatility along the way. The S&P 500 has increased 5% in that time frame while the VIX has calmed to a current low level of 14.38:
IBD: Confirmed uptrend
BCI: Moderately bullish slightly favoring OTM strikes with an eye to the FOMC meeting this coming week which could favorably impact our markets
Wishing all our members the best in investing,