Do Most Options Expire Worthless? (Part 2)
Posted by Mark on October 1, 2015 at 06:44 | Last modified: October 23, 2015 10:14In the last post I detailed what I believe to be the root of this notorious options myth. Today I bring some critical analysis to the party.
I’m going to let some other writers do the heavy lifting. Let’s begin with this:
> A common claim is that 90% of options expire worthless,
> and that therefore it is better to be a seller of options
> than a buyer of options. This claim misstates a statistic
> published by the Chicago Board Options Exchange (CBOE),
> which is that only 10% of option contracts are exercised.
>
> But just because only 10% are exercised does not mean
> the other 90% expire worthless. Instead, according to the
> CBOE, between 55% and 60% of options contracts are
> closed out prior to expiration.
So here’s the rub: did the CME data showing 75% of all options held to expiration expired worthless mean 75% of all options expire worthless? Not necessarily. We would need a breakdown of options held to expiration vs. options closed out before expiration.
Continuing on:
> So if 10% of options contracts end up being exercised,
> and 55-60% get closed out before expiration, that leaves
> only 30-35% of contracts that actually expire worthless.
30-35% vs. 75% is a big difference and that, evidently, is what makes this such a big option myth.
Here is another post on the subject:
> 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 [sic] 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.
Love it! It’s a compelling argument, too. I found a forum post from 2008 that read:
> Summa is a proponent of selling options, so at the
> very least he has a vested interest in putting forth
> the conclusions of this study which has lent
> credence to his book for years.
So if it is indeed “bullshit” then now we have an underlying motive for his writing it in the first place…
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