Credit Spreads

Quote from aphexcoil:


Where did you find the statistic that 9 out of 10 options expire worthless? I've heard it countless times yet I've never seen a documented quote from a respected journal or source.
I personally think the question is to vague when one asks, "What percentage of options expire worthless?"
Are you talking ALL options (deep in the money, in the money, at the money, out of the money and deep out of the money) -- or is the question asking, "What percentage of OTM options expire worthless?"
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I think a better question to ask perhaps would be :

What percentage of option buyers would lose money (purely in terms of premium paid for the option) if their options were held to expiration?

To answer your question, I would think, by definition, at the close of the last day of trading, an OTM option, by virtue of being "(O)ut of (T)he (M)oney", should be worthless, or very close to it, barring certain exceptions. For example, the market expects an FDA or court ruling after market close on Friday, in that case, some OTM options should have value, even though they cease trading in that option at the market's close.
 
It could well be an urban myth. It wouldn't be too difficult for a talented programmer to add up the number of options, both number of strikes and then times that by volume, in a database and compare the number in and out of the money. I will ask at www.callsandput.com
 
Quote from just21:

It could well be an urban myth. It wouldn't be too difficult for a talented programmer to add up the number of options, both number of strikes and then times that by volume, in a database and compare the number in and out of the money. I will ask at www.callsandput.com
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That is already done in part, with Max-Pain theory. However, Max-Pain theory only considers the relationship between stock price, strike price, type of option, and size of Open Interest. What I am interested in (which Max-Pain theory does not incorporate) is the price the option buyer paid for the contract.
 
Most likely if the puts AND calls are included the conclusion that 90% of options expire worthless is incorrect. It would be a stretch but there may be some validity when just looking at only one of the sides.

Good trading.
 
Two of my favorite quotes from Jimmy Rogers in Market Wizards:

"So, I went into the summer positioned for a collapse. I was short stocks and short calls. I don't buy options. Buying options is another fast way to the poorhouse. Someone did a study for the SEC and discovered that 90 percent of all options expire as losses. Well, I figured out that if 90 percent of all long option positions lose money, that meant that 90 percent of all short option positions make money. If I want to use options to be bearish, I sell calls."

"Don't tell me [about reversals]. It might mess up my mind. I don't know about those things and I don't want to know."
 
Quote from Doubter:

Here is some more food for thought. In a credit spread if the underlying stays flat or goes in the direction you want you win. If it goes against you you lose. So of three ways to go you win on 2 and lose on 1. This helps your odds. By taking in .75 or .80 on a 5.00 strike difference you are risking at about 6 to 1. One loss means you have to have 6 total wins to break even. With a 2.50 strike difference you have to win 3 times to offset the 1 loss. If your picks are 50/50 then your odds aren't too good. I don't know if you are doing this but you really need to use a risk graph to analyze these things.
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Your analysis is correct only if you assume he holds to expiration and takes the max loss. That is the worst possible outcome. Still, as you point out it takes a number of winners to recover from that disaster. I have found that it is better not to try to expire these spreads unless they are way OTM. They have a way of screwing you in the last few days otherwise.
 
Contrary to what many think, the vast majority of options do not expire worthless. The facts are as follows: approximately 10% of options are exercised, from 55% to 60% of option positions are closed prior to expiration, and about 30% to 35% of options expire worthless. Note that 90% of options go unexercised, which is very different than expiring worthless. It should also be noted that this says nothing about profitability. Option positions closed prior to expiration may be profitable or unprofitable. Options that expire worthless may not be unprofitable if they were part of a strategy that involved other securities such as covered call writing.

from the CBOE website. Why do 90% of options go unexercised if they have value? Or are they saying that these are closed positions before expiry?
 
I am looking at the covered call sheets from www.callsandputs.com to find my positions. Looking at the daily chart and then the option prices in qcharts and IB tws when the option prices look incorrect in qcharts. Anybody using www.ivolatility.com www.eztrade.com or www.poweropt.com ? The covered call sheets are giving lists of the most expensive options compared to stock price, as a percentage, so I presume I am looking at high volatility options and ones with stock prices near a strike.
 
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