Do Most Options Expire Worthless? (Part 2)

In 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…