Document View

"Any time there's a big options trade, the market makers' hedging is going to impact the stock price," said Jud Pyle, an analyst with PEAK6 Investments. Since investors find it valuable to know where a stock is likely to close, some banks have started to track stocks that could get pinned.

(c) 2009 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.

If J. Crew Group's stock closes at $25 on Friday, it mightn't be an accident.

As options become more popular, a phenomenon known as "pinning" has started to exert influence over the direction stocks take, especially on days when options expire. J. Crew finished Wednesday at $24.23.

Long debated and often misunderstood, pinning describes a situation in which options market makers, professional traders who take the other side of investors' orders to buy and sell options, inadvertently force a stock to close at a certain price.

Here is how it happens: When market makers buy call options -- the right to buy a stock -- they hedge themselves by selling shares. And when they buy put options -- the right to sell a stock -- they buy shares.

On days when options are set to expire, like Friday, market makers adjust their hedges, buying and selling thousands of shares of stock. In doing so, they push a stock toward the strike price of the options they hold. In other words, they "pin" the stock to a certain price.

"Any time there's a big options trade, the market makers' hedging is going to impact the stock price," said Jud Pyle, an analyst with PEAK6 Investments.

Since investors find it valuable to know where a stock is likely to close, some banks have started to track stocks that could get pinned. Analysts at French investment bank Societe Generale screen hundreds of companies each month in attempts to determine which are likely candidates.

Among the stocks that could get pinned on Friday are Gymboree, which could close the session at $35, and Tessera Technologies, which could close at $25, according to Societe Generale. Gymboree closed at $33.90 and Tessera at $24.81 on Wednesday.

While there is some debate concerning the degree to which pinning affects the prices of publicly traded shares, a 2005 study found that options market makers affect the movement of a stock by an average of at least 0.165 percentage point on days when options expire.

Given that the volume of options trades has more than doubled over the past four years, pinning could start to have a bigger impact on the market.

"If liquidity in stocks doesn't change, then I think the increase in options trading would make pinning more likely," said Neil Pearson, a professor of finance at the University of Illinois, who conducted the 2005 study.

Credit: By Tennille Tracy