May

7

From Market Tremors: Quantifying Structural Risks in Modern Financial Markets, discussing how dealers and market makers need to rebalance delta on their option book with futures causing mean reversion:

We observe that interest tends to be highest for strikes that are a multiple of 50. Investors typically like round numbers.

Hence Sogi levels. Finally, an explanation:

Pinning Arises from Dealer Hedging: Avellaneda and Lipkin (2003)

We propose a model to describe stock pinning on option expiration dates. We argue that if the open interest in a particular contract is unusually large, Delta-hedging in aggregate by floor market-makers can impact the stock price and drive it to the strike price of the option. We derive a stochastic differential equation for the stock price which has a singular drift that accounts for the price-impact of Delta-hedging. According to this model, the stock price has a finite probability of pinning at a strike. We calculate analytically and numerically this probability in terms of the volatility of the stock, the time-to-maturity, the open interest for the option under consideration and a "price-elasticity" constant that models price impact.

Asindu Drileba writes:

I first saw this in Vic's Practical Speculation. I discovered a few edges based on this in the Bitcoin market.


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