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Stock Options Education - Pin Risk - Learn to Stock Trading, Option trading, stocks - YouTube
Channel: Jonathan Rose
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and today we're gonna be talking about
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pin risk what it is how it could hurt
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you and how understanding it can really
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help your options trading as well let's
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talk about why RCW why RCW you can see
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on the open on the 8 strike the open
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interest is ten thousand now for this
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example I preferred that ten thousand to
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be on the 10 strike because Huayra CW is
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trading at ten sixty so let's use our
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imagination and let's pretend those ten
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thousand open interest contracts are
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actually on the ten strike so I made a
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little Excel spreadsheet YRC W ten
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dollars ten strike open interest one
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thousand nine 1009 in the money of those
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1000 options contracts is a hundred
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thousand shares of stock okay because if
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you're long a thousand calls on the ten
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strike and YRC W expires at eleven
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you're long a hundred thousand shares at
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expiration if you didn't cover those
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options so let's talk about pin risk and
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let me explain why it exists and how it
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works our positions long a thousand of
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the ten strike calls there are 60
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seconds to go before expiration on the
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third Friday in this example the stock
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price is nine dollars and 80 cents so
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right now we're out of the money by
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twenty cents the traders position at
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expiration if we close at nine eighty is
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nothing these are out of the money these
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are going to expire worthless the Delta
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is zero the markets pricing in a zero
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probability of this stock ending up in
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the money next example if we're long one
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thousand of the tenth strike calls and
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there's 45 seconds to go before
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expiration if the stocks price is at ten
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ten at expiration we're along a hundred
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thousand shares of stock the deltas
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probably about one the markets pricing
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in a hundred percent probability with 45
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seconds in this example
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what the trader needs to do is the
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trader needs to sell a hundred thousand
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shares unless they want to be long a
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hundred thousand shares if they sell a
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hundred thousand shares at ten ten and
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their long a thousand from ten they're
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gonna lock in ten cents this example
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long a thousand ten straight calls
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nine seventy traders position that
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expiration is zero but let's say they
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sold the thout a hundred thousand here
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the stock price went from ten ten ten oh
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five ten nine ninety because it knocked
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it down well right here the options are
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now CLIs but if we do a carryover from
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the previous example you're short a
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hundred thousand shares so you have to
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buy a hundred thousand shares what's
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gonna happen when you buy a hundred
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thousand shares of stock nine eighty
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nine ninety ten ten ten
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oh no fifteen seconds to go until
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expiration you're still long the ten
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strike calls you have no stock position
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because you shorted a hundred thousand
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and then you bought a hundred thousand
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back so what do you do at expiration
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you'd be long a hundred thousand you
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need to sell a hundred thousand shares
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ten ten ten
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now we pin when you pin and the options
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expire at your strike price here's
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something people don't know about
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options we can trade these things until
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4:15 Eastern Time on Friday right but
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options actually expire 10:00 a.m.
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Eastern the next morning so if it
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expires at 10:00 and you're along a
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thousand of the ten strike calls you
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don't really know if you're going to get
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the stock or not get the stock because
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it expired directly on the strike if it
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expired at 10:01 you're definitively
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long a hundred thousand chairs because
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the rule is if you expire one cent in
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the money the exchange is going to
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assume that you want to exercise your
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options if it expired at 999 you're not
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going to have any position because the
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exchange it's going to rightfully assume
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that you don't want to be long stock
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from 10:00
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if it's trading at $9.99 that's how pin
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risk works guys how I manage pin risk if
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you're in this kind of situation and of
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course you're probably not going to be
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there with a thousand options but if
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you're there with ten options
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cover your position don't mess around
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with pin risk it's a market makers
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playground they're playing all the games
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don't mess around
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cover your position don't deal with it
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hope that helps
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my new members I'm excited to see you in
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class on Friday we'll continue this
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conversation
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Jonathan active day trader
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