15 July 2009

90% Of Options Expire Worthless

In the previous post, the quoted "guru" stated unequivocally that 90% of options expire worthless, wit the implication that option sellers have an edge over buyers... actually it's often explicitly stated.

According to the Chicago Board Options Exchange, typically only about 30% of options expire worthless in each monthly cycle. Only about 10% of options are exercised during each monthly cycle, usually in the final week before expiration. In fact, over 60% of all options are traded out in the marketplace. This means that buyers sell their options in the market, and writers buy their positions back to close.

So we see that the "90% of options expire worthless myth" is... a myth.

The fact it that there is no inherent edge in buying or selling options at point of inception, if they are correctly priced. It can be determined in retrospect, but the problem is that we cannot see into the future. There is no way of knowing whether the option premium is cheap or expensive, because we don't know what the underlying is going to do.

I like being nett short premium, because I am better at managing those positions for more consistent profit, but it does not mean being nett long premium is wrong. Each has it's own set of management implications.

Horses for courses.


Dean said...

The debate over what percentage of options expires out of the money misses the point. Even if it were true that 90% of options expired worthless it would mean nothing. There's also the matter of how much you make on your winners vs how much you lose on your losers.

If one makes money 4 times out of 5 - but that 5th time loses ten times what he made the other 4 times - he'd still be a loser.


Wayne said...

Yep that's the second part of the argument. The standard expectancy equation.

Thanks for highlighting that point.