← InstitutionalLesson 10 · 3:51
Pin risk, assignment and weekend gamma
Summary
You can explain why a short option's hedge turns from a gentle slope into a cliff at the strike near expiry, and what being pinned to the strike means for assignment. You can describe the weekend trade-off of collected decay against unhedged moves, and why desks close or roll before the last hour.
Key terms
- pin risk
- The risk that the price closes right near the strike at expiry, leaving you unsure whether you will be assigned.
- assignment
- When a buyer exercises and you, as the seller of that option, must deliver.
- exercise cut-off
- The latest time after the close that a holder can choose to exercise, which differs by broker and product.
- weekend gamma
- The risk of carrying a short option's gamma over a weekend, when the whole move arrives at once with no chance to re-hedge.
- roll
- Selling a new near-dated option against the same bought option once the old one has ended or been closed.
Check yourself
Answer each question to see why the right answer is right.
1. Thirty minutes before expiry, your short XYZ $100 call's hedge needs 1 share at $99.50 and 99 shares at $100.50. What does this show?
2. XYZ closes at $99.95, a nickel under your $100 short call strike. Why are you still not sure what happens?
3. After that $99.95 close, news sends XYZ to $102 after hours and the holder exercises. What is your position on Monday?
4. You sell a call with 7 days left and hedge it at Friday's close. The engine counts calendar days. What does the weekend bring?
5. How do desks step around the expiry cliff in the lesson's example?
Finished the video and the quiz? .