This describes the situation whereby a share price gets attracted towards at a particular level at which there are lots of options struck which are shortly due to expire.

A good example is RBS in its current capital raising which is set at 65.50 pence (the “Strike price”).  The UK Government has agreed to buy any shares that are not bought by other investors.  Shareholders are entitled to buy shares at the strike price (their “entitlement”) and have to pay for them on 25 Nov 2008 (the “pay date”).  This creates a situation where an investor who fully intends to subscribe for their entitlement can buy those shares in the market before the pay date if the share price falls below the strike price (RBS shares have often dipped below 65.50 pence since their capital raising was announced on 13 Oct 2008).  If RBS shares then rally above the strike price, the investor can sell the shares they bought lower down, safe in the knowledge that they can take up their entitlement and replace them at the strike price.  This process can be performed ad infinitum until the option expires on the pay date.

In reality what happens is that RBS shares trade very close to (get “pinned to”) the strike price, especially as we get the nearer the pay date, so as to prevent these ‘risk-free’ profits being extracted from the market by investors who fully intend to take up their entitlements.  The pinning situation disappears after pay date and a support/resistance level is left at the strike price in its place.  Pinning happens less often in traditional rights issues because many big market participants are already on the hook to purchase stock having already underwritten the rights issue.  In the current RBS example this is not the case because the Government has underwritten the stock placement.