Pin Risk Management Guide

What is Pin Risk?

Pin risk is one of the most frustrating and least understood risks in options trading. It's that sinking feeling when the stock closes at 4pm ET at exactly (or very close to) your short strike price, and you have absolutely no idea whether you'll be assigned or not. You won't find out until Monday morning, leaving you with an entire weekend of uncertainty.

Here's the scenario: You sold an iron condor on SPY with a 450 short put. Friday at 4pm close, SPY closes at exactly $450.00. Is your put ITM or OTM? Technically, it's exactly ATM—zero intrinsic value. But here's where it gets complicated:

• Options don't officially expire at 4pm—they expire Saturday at 11:59am ET
• Option holders have until 5:30pm ET Saturday to notify their broker of exercise decisions
• After-hours movement Friday and any gap Monday morning create uncertainty
• You might be assigned on 1 of your 10 contracts but not the other 9 (partial assignment)

Result: You close your laptop Friday at 4:05pm thinking everything's fine, then wake up Monday to discover you're long or short 100-1,000 shares you never intended to own.

Why Does Pin Risk Occur?

1. Automatic Exercise Procedures

The Options Clearing Corporation (OCC) has automatic exercise rules:

• Any option $0.01 or more ITM at expiration is automatically exercised
• Options exactly ATM ($0.00 intrinsic value) are NOT automatically exercised
• Option holders can manually exercise any option, even OTM options

This creates a gray zone. If the stock closes at exactly the strike, retail holders often don't exercise (they may not even know they can). But institutional holders might exercise anyway, especially if after-hours movement pushed the option ITM.

2. After-Hours Movement

Stock trading continues until 8pm ET. If SPY closes at $450.00 at 4pm but drops to $449.50 by 5pm:

• Your 450 puts are now $0.50 ITM after hours
• Some option holders see this and exercise before 5:30pm Saturday
• Others don't check and don't exercise
• You might be assigned on some contracts but not others

3. The "Max Pain" Phenomenon

Stocks have a peculiar tendency to close near strikes with heavy open interest on expiration Friday. This isn't necessarily manipulation—it's driven by market maker delta hedging. As expiration approaches, MMs adjust stock positions to stay delta neutral, which can push stocks toward strikes with the most open interest.

The SPY 450 strike might have 100,000 contracts open. Market makers spent all week adjusting their hedges, and at 4pm, the stock naturally gravitates toward $450. This creates mass pin risk for thousands of traders simultaneously.

Pin Risk Scenarios: What Can Happen

Scenario 1: Full Assignment (Worst Case)

Setup: Sold 10 SPY 450 puts as part of iron condor, SPY closes at $450.02 (barely OTM)

Friday 4pm: You think "I'm safe, $0.02 OTM"
Friday 5-8pm: SPY drifts to $449.80 after hours
Saturday 5pm: Option holders exercise all their 450 puts
Monday 9am: You wake up long 1,000 shares SPY at $450, market opens at $448, instant $2,000 loss

Scenario 2: Partial Assignment (Confusing)

Setup: Sold 10 SPY 450 puts, SPY closes exactly at $450.00

Result: Some option holders exercise, others don't. You're assigned on 3 contracts (now long 300 shares) but not the other 7. Your position is now:

• Long 300 SPY shares (unwanted)
• Still short 7 puts at 450 (also unwanted)
• Long your protection puts at 445 (10 contracts)

This creates a Frankenstein position that's difficult to manage and different from your intended strategy.

Scenario 3: No Assignment But Should Have Been

Setup: SPY closes at $449.98, your 450 calls are $0.02 ITM

You expect: Assignment on all contracts
What happens: After-hours, SPY rallies to $450.20. Your calls are now OTM after hours. Only some holders exercise. You're assigned on some but not all.

Now you're short random amounts of stock—maybe 500 shares instead of 1,000—creating position imbalance and risk you didn't plan for.

How to Avoid Pin Risk

Pin risk is entirely avoidable. Here's how professionals handle it:

1. Close Positions Before 4pm Expiration Friday

This is the golden rule. If your short strike is within $1-2 of the current stock price going into expiration Friday, close it. Don't wait around hoping it stays OTM.

Guideline:

• Stock within $1 of short strike → Close by 3pm Friday
• Stock within $0.50 of short strike → Close by 2pm Friday
• Stock within $0.25 of short strike → Close immediately

2. Close Spreads as a Unit

If you have an iron condor or vertical spread, close both legs together. Never let one leg expire while closing the other. Closing your long put but leaving the short put exposes you to full assignment risk without protection.

3. Use "Do Not Exercise" Instructions

Most brokers allow you to submit "Do Not Exercise" (DNE) instructions on your long options. This prevents automatic exercise even if they're ITM. Use this to avoid unwanted stock positions on your long legs while managing your short legs separately.

4. Exit 7-10 Days Before Expiration

Many professional traders never hold through expiration week. They close positions 7-10 days out, eliminating pin risk, gamma risk, and expiration day chaos. The last few dollars of profit aren't worth the weekend stress.

5. Trade European-Style Options

SPX, NDX, and RUT options are European-style and cash-settled. There's no stock assignment—you just receive or pay cash. Pin risk still exists (uncertainty about whether you're ITM), but you won't wake up with unexpected stock positions.

What to Do If You're Pinned and Assigned

Despite best efforts, sometimes you'll be pinned. Here's your Monday morning action plan:

Step 1: Assess Your Position (Pre-Market)

Before 9:30am open:

• Check assignment notifications from your broker
• Determine exactly how many shares you're long or short
• Check pre-market stock price and gap risk
• Calculate your current P&L including the stock position

Step 2: Close Stock Position Immediately

At 9:30am open, close the stock position right away. Don't hope for a better price or try to manage it. Every minute you hold unwanted stock is additional risk.

Use limit orders near the bid (if selling) or offer (if buying): Market orders on large positions at the open can get filled at terrible prices due to wide spreads.

Step 3: Manage Remaining Options

After closing stock:

• If you have protective long options, close them for whatever value remains
• If you have unassigned short options, close them to eliminate further risk
• Calculate final P&L and move on

Understanding Your Broker's Pin Risk Policies

Different brokers handle pin risk differently:

Auto-Liquidation Policies

Many brokers automatically close ITM options 1-2 hours before expiration to protect both the trader and the brokerage from pin risk. This can be helpful (avoids pin risk) or harmful (forces you to close at bad prices).

• Robinhood: Auto-closes ITM spreads ~1 hour before expiration
• TD Ameritrade: Auto-liquidates at-risk positions starting at 3:40pm Friday
• Interactive Brokers: More hands-off, expects traders to manage their own positions

Check your broker's policies! If you're approaching expiration with ITM options, know when your broker might intervene.

Key Takeaways