Pin Risk in Delta Hedging Near Option Expiry

Summary

The document explains why delta hedging an at-the-money option close to expiration can leave a trader exposed to uncertainty over exercise. If a short option is exercised, the seller may end up with a risky position in the underlying; if the hedge was placed but the option expires unexercised, the trader may instead retain an unwanted underlying position. This expiry-related uncertainty is commonly called pin risk.

The answer describes the exposure created by either leaving the position unhedged or hedging it fully, and notes partial hedging as another possible response. It does not give a hedge ratio, quantify the probabilities of exercise, or compare risk-management approaches. The practical point is that a hedge around expiration cannot guarantee a neutral position when exercise status is uncertain and the underlying can move adversely during the transition.

Key ideas

• Uncertain exercise near expiration creates pin risk for short options.
• Leaving a short option unhedged can result in an exposed underlying position if it is exercised.
• Hedging before expiration can leave an underlying position if the option expires unexercised.
• Partial hedging is possible but does not eliminate exposure to adverse price moves.

Tags

# Why is delta-hedging of ATM options near expiry difficult to do?


# Why is delta-hedging of ATM options near expiry difficult to do?












Can someone explain to me why the delta-hedging of ATM options near expiry is difficult?

## Answer by Alexey Kalmykov (score 6, accepted)

https://quant.stackexchange.com/a/4481

This is usually called Pin Risk. It's difficult because there is a high degree of uncertainty regarding the whether the options you sold are exercised or not. If you don't hedge, your short options could be exercised and you are left with risky net short position in the underlying. If you hedge and your short options are not exercised, then you have a long position in underlying after expiry. Alternatively, you can partially hedge. However, in any case, you are potentially exposed to risk of adverse underlying movement.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.