A state of the delta of an option which makes the variation of an in-the-money option‘s hedge ratio extremely wide just prior to expiration. It is the risk that arises when the price of an asset underlying an option approaches its strike price as it gets closer to expiration date. This is the case when sellers of options attempt to hedge their short positions by creating delta-neutral portfolios.
The seller of an option faces the risk that exercising cannot be predicted with certainty. Thus, the option seller may end up with an unexpected residual position in the underlying. The seller is also exposed to the risk of incurring losses on the underlying’s price movement before closing out that residual position on the next trading day.
This is also known as a pin risk.
