Oct

21

Pinning, from Tom Larsen

October 21, 2007 |

PinIn the 1970s I worked for OCC. Every expiration, we spent all day working with employees from OCC member brokers, retrieving exercise instructions from them for everything that was in the money. We would run two batches, and usually it would take all day because many people had to be called regarding their exercise instructions. Then OCC hit on the idea of having "automatic exercise" thresholds. At first, they were 75 cents in the money. So people signed disclosure documents authorizing this in their accounts. Before that time, there were all these phone calls employees had to make to find out if the customers wanted to exercise their options and the answer was always, "of course," because by Saturday, what else could you do? Over time, costs fell and so did the threshold.

It is frequently a good idea to totally avoid this threshold issue, by taking advantage of the fungible nature of listed options and trading out of them, which also prevents "pinning" the stock at the strike which can create havoc with a complicated position. For example, you might have to guess whether you should exercise a long to offset an expected assignment on a short that may or may not occur.


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1 Comment so far

  1. John Terry on March 16, 2010 5:29 am

    you worked for OCC since 1970s. well! that was a long time! you are really loyal.

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