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Guide To Gold Pin Risk
Courtesy of www. fmxconnect.com
All About Pin Risk
Today is July options expiration in silver and gold. We’d like to take this opportunity to go over some of the basics and correct some misconceptions on pin risk and what it entails.
#1 Pin risk is not about direction manipulation, it is about volatility management (or manipulation if you prefer).
#2 Pin risk is classic weak hands vs. strong hands trading or described differently, trading where the deeper your pockets, the more likely you are to be the winner.
#3 Pin risk starts with a simple premise, it’s about long options players versus short options players. Its not about bulls vs. bears.
#4 The more money you have the less likely you are to be long options. The less money you have the less likely you are to be naked short options. Subpoint: people with money don’t buy insurance, they sell it. People who cannot bear catastrophic risk or must manage their bankroll are net buyers of options.
#5 Options buyers almost always have less capital then option sellers. This is because they must limit their risk to participate in a market (can’t afford to have infinite risk) like an options seller can.
Starting with the fact that buyers of options almost always have less money than sellers of options, its easy to see how this is played out. But first it may be helpful to explain why direction doesn't matter.
Most professional traders, i.e. bank dealers, proprietary trading firms and principle market makers hedge their directional risk. Longs of options want the market to move away from the option they bought in either direction. Shorts want the market to move toward the strike that they sold.
Longs make money though gamma scalping. Gamma trading allows them to buy low and sell high in the underlying market without risk of adverse movement. Conversely, the disciplined short option player should sell high and buy low hoping that the market movements will cost him less money than the premium he collected from selling the options. But if the short option player is a single bank with a 1 billion dollar balance sheet and can leverage itself up to 40 times he may not be so disciplined. He may instead be encouraged to play the “bully” game, and attempt to pin the strike. He may do this by selling high (adding to his position) and buying low in an attempt to manage volatility for the brief period of time before expiration. Meanwhile the longs are almost always a fragmented community of smaller firms and independent traders using their visa cards to trade. They don’t have the capital or leverage and usually are a fragmented group. Their disciplined trading of selling high and buying low contributes to the gravitational pull of the strike. The shorts who should be counterbalancing those trades by buying high and selling low are actually buying high and selling low.
This goes on all the time but to be clear I do not feel that big market players can force a market close to a strike. They can however facilitate pinning if the market is already there. In a sense pushing the weak players over the cliff when they have already put themselves on the edge. It is manipulation.
I realize this is a lot to say in a short article but we will be writing an in-depth report on pin risk and how expirations and how expirations affects price movement in the coming week. For now, know that in my experience as a market options market for 20 years, that when a single bank is short a straddle and 450 guys like me are long it we’re probably going to pin the strike. The times that strikes do not get pinned are when the longs are in the hands of a strong small pool of speculators who are actually directionally biased. This is rare. Examples of longs who have run in the banks are when Fibro in silver in 1995 or when JPM pushed the silver market in 2008. There are many other instances but it really comes down to this. How much money do you have and how concentrated is the open interest?
For today, the strikes that matter are the July 1200 and 1250 strikes. The 1200 strike has more open interest but we are closer to 1250. Your guess is as good as mine if the graviton pull of either strike will attract the futures today. For those who care, options officially expire at 4PM on the comex which means if you have open interest you have the time between when the market closes and options expire to decide whether to exercise or not. On the flip side, you don’t need the market to pin the strike when comex closes. You need the market to be pinning the strike in the afterhours when the underlying is more thinly traded.
-Elizabeth Thawne
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Has anyone noticed that Erin "C cup" Burnett has asymmetrical breasts?
I think I've finally figured out the problem. That parachute harness is squeezing your family jewels too tightly, precisely where (it just so happens) your brain is also located. I would suggest you try releasing the pressure a bit, but it may already be too late.
more like b cups
I stand corrected. My brain is somewhat squeezed by the harness and I was in my cups when i wrote that.
Well, from looking at these charts, I'd guess that gold will go out around 1232 today.
WOW!!
I will gladly be wrong about this one! 1248 last.
Looks like they have a roadblock in front of $1250.
tm,
Yeppers...........
same as it ever was...just like last week.
they will expire out the calls at 1230. count on that. Big players IN THIS MARKET OWNED AND OPERATED BY JPM will take out those defiant bugs.
Question is....will they take the PR risk and go for the cluster of calls at 1200?
hand me some popcorn.
Not a chance. They'd like to go to 1220 but, beyond that, too many puts are in the money.
There is a lot of buying support around 1225, too.
Tyler and all,
For a retail investor that doesn't understand the impact of options expiry, I appreciate the analysis. Any more light you can shed would be appreciated.
From what y'all are saying, if this closes in the green today, it would be a sign that Crimex and their lackeys have lost control of gold. From all I read, that may not be too far-fetched to believe... it could happen today, eh?
Excellent article.
Executive summary - if you aren't a big house, or the house, dont hold long option positions to expiration. You get fucked on delta and gamma.
1227 my estimate, maybe coloured by optimism as that's my bid level.
actually, i think anyone who buys calls at the Comex is just a flat out sucker. why would you buy something in a game that is openly rigged? and where you know they are going to just come and take your money......
Yup. You don't get a 100% known quantity in investing (though that would be nice) but manip'd markets are 100% unknown quantities for the manipulatee.
Right. It would be easier on the stomach acid to just have a monthly deduction from your paycheck sent directly to the Boyz. You're going to give it to them anyhow so why deal with all the daily hassle? Just figger out how much you want to lose and send it to them directly. I don't play, so I don't have to pay.
.
Forget About Gold- China Is Afraid Their Citizens Will Dump the Yuan for Virtual Money
Wow, cool article. I've never heard of a gamer stabbing another gamer in real life for steeling a virtual gaming sword. Amazing, too, that a currency developed for gaming was beginning to challenge the nation's currency.
This would be an awesomely complex and adaptive market if they just allowed all currencies (public, private, and natural) to all compete.
If you liked that article, you should read "Play Money" by Julian Dibbell. It's about the online currency of Ultima Online. His analysis extends onto any system of money, and the author makes it an interesting and funny read.
all that said, its always fun to watch the fireworks that start at 1:30....
but this market is not manipulated, nah...right CTFC?
what a joke these pretenses of regulators are....i hope the bribest they get from JPM are at least decent....
''#5 Options buyers almost always have less capital then option sellers. This is because they must limit their risk to participate in a market (can’t afford to have infinite risk) like an options seller can.''
Optionsellers thinking they can take infinite risk in a finite world is always a guarantee for fireworks. Sad to see that they still did not learn. The taxpayer is broke, optionsellers are not to big to fail this round. Only timing is what is left to worry about.
Those trendlines are always broken. Pointless to use them as gold is so manipulated.
Excuse my lack of understanding here. So if I was JPM and that I did want to make options I wrote expire worthless, what's the cut off time that I need to hold the price low until?
Cheers
Gold just spiked to 1245
That's not supposed to happen. Are the Chinese getting involved?
Looks like the game is over for gold's trading pattern, probably just because more people are expecting the pattern to break now. As for silver, too many bulls are still playing along by trading as part-time shorters.
Who are the Chinese?
I'm gettin' wood over here...
Hard assets?
To all, looks like $1250 is on the table.
Cheers, Liz
what about flip flop traders, like the obvious silver bulls who short silver, too, just before options expiry? They're set to continue the manipulation should JPMorgan stop.
They will be rolled over by the giant steamroller that is current buying pressure.
tm,
Amen, again..........just a matter of time.
The Physicals will be the ultimate ACE that kills the Bitch.
Elizabeth,
Care to comment on Silver?
Also, care to comment on what will happen if/when the small time trader says "screw it I am not playing in the PM options markets anymore"? or simply decides to short every rally trying to side with the big boys?
Will JPM etc. be caught flat footed and then decide to go long in order to take scalps?
Silver is even easier to pin than gold. The reason is, whenever a market has concentrated OI in few hands, you essentially have an oligopoly. Markets that are easier to manipulate have the following qualities.
1. Their contact size is very large.
2. There is very little in the way of investor interest in the actual contract. Therefore, it is largely dominated by professionals.
3. The product is discontinuously liquid. meaning it trades in big volumes.. in chunks with big gaps in between trades
4. The publicly displayed prices that are on COMEX are the pricing mechanism for the products. But more volume trades in the OTC markets than on exchanges. Silver is a textbook example of all these things. hope that helps.
Sounds like SPX to me ;-)
Cheers for this, look forward to your in-depth article.
Just like last month, all the calls expired at 1200 and Crimex barely kept it away at 1199
It's a fistfight. Go GOLD! And watch Silver too make a run at 19 where the action is.
Looks like 1245 is going to be the number.
http://jsmineset.com/wp-content/uploads/2010/06/June2410Gold.pdf
That EURO buying support has returned ...
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
And the ultimate extinguisher is? Gold, of course.
http://thedailybell.com/1157/Antal-Fekete-Architecture-for-a-New-World-F...
Elizabeth,
To avoid confusion:
"Longs make money though gamma scalping. Gamma trading allows them to buy low and sell high in the underlying market without risk of adverse movement. Conversely, the disciplined short option player should sell high and buy low hoping that the market movements will cost him less money than the premium he collected from selling the options."
I think you meant to say that the disciplined option writer would sell low and buy high, negatively scalp themself in hedging their deltas.
right you are. Sorry about that. thought it was changed in the original post. my bad.
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