Do Most Options Expire Worthless? (Part 1)

In my opinion, one of the more devious option myths of all time is that most options expire worthless.

Based on my research, here is an article detailing the original findings. You can also do an internet search for the author’s report entitled “SELLERS VS BUYERS: WHO WINS? A STUDY OF CME OPTIONS EXPIRATION PATTERNS.” In this blog mini-series, I will therefore be talking about the article and the report, respectively.

I will start with the report since it was written one year earlier in 2002. From the introduction:

      > Three key patterns emerge from this study: (1) on average, three
      > out of every four options held to expiration end up worthless;

Jumping ahead to the conclusion:

      > Data presented in this study comes from a three-year report
      > conducted by the CME of all options on futures traded on the
      > exchange. While not the entire story, overall the data
      > suggests that option sellers have an advantage in the form of a
      > bias towards options expiring out of the money (worthless)
      > [italics mine].

I will now take a closer look at the article, which begins as follows:

      > While there are certainly many viable options-buying strategies
      > available to traders, options expiration data obtained from the
      > CME covering a three-year period suggests that buyers are fighting
      > against the odds. Based on data obtained from the CME, I analyzed
      > five major CME option markets… and discovered that three out of
      > every four options expired worthless….
      >
      > …Three key patterns emerge from this study: (1) on average, three
      > out of every four options held to expiration end up worthless;

Scrutinize these passages very closely. Do you see any difference between paragraphs of the the report/article? Do you see any difference between the content of the report and the article?

In the next post I will detail the mythological aspects of this content.