The Expiry Trauma
The gush of fresh air from opening the window made Joe sit up with renewed energy. The trading desks were buzzing with phones and people were yelling at prices. Maybe there is something he could do to make himself unpin from his chair. Almost every other expiry he gets his dreadful time when he faces that mother of all (well almost) fears: the pin risk.
All option guys would have felt this traumatic moment one time or another and Joe is no different. He gets very philosophical and even considers quitting at these horrendous times of expiry management. The matter at hand was very simple but almost 500 years ago some wise man had wisely quipped that “simplicity is the ultimate sophistication”. Sophisticated it was because of the position he was in.
As a market-maker of options he found himself looking at his book with a short of 1000 lots of the coffee 2400 calls that was going out of the window (expiring) that very day. It was just 9 in the morning but in spite of the cold air hitting his face, he was unable to control his squirm and sweat. He had quite a few chats with his brokers and fellow traders the previous day. As always opinion was divided in such matters! The market was generally calm but there have been talks about an impending shipping union strike in Vietnam and an increase in the berry borer population in the abundant fields of the Daklak region. Some capital unrest was already felt in the prices, especially in the front month spreads. The Jan/March settled somewhere close to zero (that typically trades discount in the twenties) the previous day and this definitely was not healthy news for Joe’s positions.
Two days ago he even tried squaring off his positions through outright calls or call spreads but only to find them expensive than his volatility marks. He loosened his tie and rolled up his sleeve. Battlefields require such special gestures! He took a deep breath and revisited his options. The outright Jans settled at 2380 just shy of the 2400 mark and the magnet strike (the one with the largest open interest) was also the 2400. If he bought all the 1000 Jan futures now and hoped that the market would cross north of 2400 he runs a risk of the 1000 longs and if he did not then he was naked on those calls. Flippantly even at that juncture he thought maybe pin risk was aptly named from something similar on a chess board?
Clearing his mind to re-focus he weighed his options. The time was 11 AM and it is just another hour left for the expiry bell to ring. With some determination and clarity, he bought about 250 lots of the Jan/March spreads at zero, he bought another 500 lots of the Jan outrights at an average of 2383 (his 500 lots buying moved the market from 2380 to 2385!) and went to grab a coke from the canteen. At 12 the Jan options expired at 2397 (not before touching 2403!) and Joe sold his spreads and outrights for a tidy profits (Jan/March was exited at 3) and heaved a sigh of relief. A corner of his mind thanked God for such small mercies and another corner of his mind still retained that healthy fear for pin risks. For he knows, that he is both fooled by randomness and spared by randomness….for the time being.
Disclaimer: All character(s) appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.
Originally published at https://www.linkedin.com.