Do Most Options Expire Worthless? (Part 3)

In Part 1 I presented Summa’s notorious option myth and in Part 2 I presented its debunking. Today I bring in one more voice of reason.

If you have spent time in the option education circles then you’ve probably heard of Brian Overby. Overby has given many presentations on different option topics and he has also authored a book on option trading. He is or has been Senior Options Analyst and/or Director of Education for TradeKing brokerage. I feel being associated with a prevalent brokerage house like TradeKing gives Overby some credibility. I think he’s less apt to spread fictional/fraudulent claims because the reputation of his employer hangs in the balance. This is no guarantee (e.g. Peregrine Financial Group) but…

Addressing the question what percentage of options get exercised, Overby writes:

      > the correct answer is this: according to the Options
      > Clearing Corporation’s 2006 trading year results…
      > around 17% of all options contracts opened got
      > exercised. About 35% expired worthless, and almost
      > half (48%) of the rest got bought or sold to close
      > in the open market.
      >
      > If these numbers seem surprising go back to the
      > basics of option for an answer. It’s easy to lose
      > sight of the fact that an option is a contract. We
      > often think of options as hot potatoes that get
      > passed around until they wind up in someone’s hands
      > at expiration. But actually, if an option contract
      > gets closed in the marketplace, it just ceases to
      > exist and will therefore never make it to expiration.

I think we can pretty much put this option myth to bed. No, most options contracts do not necessarily expire worthless and no, this is certainly no reason to sell option contracts. We may come up with other reasons but certainly not this one.