Thursday, March 29, 2012

80% Percent of Options Expire Worthless?

It comes in several flavours, sometimes stated as 80%, 90%, or whatever. It is the maxim that most options expire worthless. It is repeated so often out there in the marketplace, it is taken as a given and used as a justification to be a nett seller of options and/or promote option selling @education". It is repeated, as a mantra, by some of the most well known folks in optionland. There is only one problem, it's bullshit.

I like being a nett seller of options too, but the reason has nothing to do with the statistic of how many options expire worthless. As I sated in my previous post, it rather depends what strike one sells that dictates the probability of an option expiring out of the money. I like selling options for mostly psychological reasons; what I do has evolved mostly because of my personality direction picking prowess (poor) and how I like to trade.

Let's look at the actual figures according to the Chicago Board Options Exchange:

About 10% of options are exercised during each cycle. That means the other 90% must expire worthless, right?

Wrong! In fact over 60% of all options are traded out in the marketplace before expiry. These could be in, out or at the money.

That leaves approximately 30% of options expire that expire worthless in each monthly cycle.

Can anything be gleaned from this regarding being a buyer or seller? Absolutely not, there are so many different  strikes, strategies and combinations which are not given in this statistic that further analysis is impossible.

4 comments:

  1. Very informative post and the content is quite easy to get knowledge and Epic Research also provide relevant content about the share market.

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  2. So, of the options that aren't closed, 75% expire worthless then.

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  3. So, of the options that aren't closed, 75% expire worthless then.

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    Replies
    1. I think the article is implying that somewhere between 20% and 90% of options expire worthless, - but there is not enough data to say where in this wide band the actual figure lays.
      To take an extreme (although I think, untrue) interpretation, one could propose that most positions are closed out, so therefore perhaps it is only the worthless ones which not closed because it is cheaper not to. then only 20% - 30% expire worthless.
      - i.e. The 50%+ of closed out transactions obscures too much of the data.

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