Margin vs. options time decay

C

crgarcia

Margin at 9% equals paying 0.025% per day.

July 149 SPY Calls Ask: $4.40
have an theta (time decay) of: -0.031
This equals losing 0.70% per day, 28 times margin.

Which means:

Options writers have an edge over buyers.

If you buy options, buy them on margin, preferably portfolio margin. You get more leverage, losing less as time passes.

It's not surprising 90% of options expire worthless.
 
Quote from crgarcia:

Margin at 9% equals paying 0.025% per day.

July 149 SPY Calls Ask: $4.40
have an theta (time decay) of: -0.031
This equals losing 0.70% per day, 28 times margin.

Which means:

Options writers have an edge over buyers.

If you buy options, buy them on margin, preferably portfolio margin. You get more leverage, losing less as time passes.

It's not surprising 90% of options expire worthless.
More...

You do realize that pros pay a lot less in interest, don't you!? A good proxy for what they pay is the fed funds not some retail margin rate.

And don't use the statement you don't understand! 90% of options that are HELD TO EXPIRY expire worthless, not 90% of all options that existed at some point during the contract's life!
 
Quote from crgarcia:

Margin at 9% equals paying 0.025% per day.

July 149 SPY Calls Ask: $4.40
have an theta (time decay) of: -0.031
This equals losing 0.70% per day, 28 times margin.

Which means:

Options writers have an edge over buyers.

If you buy options, buy them on margin, preferably portfolio margin. You get more leverage, losing less as time passes.

It's not surprising 90% of options expire worthless.
More...

Crgarcia, apologies for intruding but I am new to Options and currently considering buying calls in coffee as the market has declined and with all the hype about China I think it may have some good potential from profits due to an increase in demand. What do you think I would be better off doing, buying ATM calls or selling ATM puts 3 months out. I am not taking any sides at the moment as I am not experienced enough, but I do see the point that MTE has just made in relation to options expiring worthless. I also believe that something which sounds too good to be true normally is, and if you are correct in saying that 90% of options expire worthless then my chances of making money by buying calls is going to be slim. Again I apologise for intruding but I want to start off on the right foot and get the opinions of various experienced traders after which I can then make up my own mind as to what may or may not be the best strategies to use in the Options market.Cheers.
Derivman
 
Derivman,

The statistic that 90% of options expire worthless is always used by "hype people" as a reason why people should sell options rather than buy them as this somehow presents an edge.

Firstly, this is simply not true. There's no edge in selling options vs. buying them. We had several discussions on this topic here on ET so if you're interested then use the search to find them.

And, secondly, this statistic is only half-truth. As I have mentioned above, those that use this statistic always drop the part:"options that are held to expiry". That is, yes, about 90% of options that are held to expiry do expire worthless, but there's another statistic, which says that about 90% of options are closed prior to expiry. As result, it means that those 90% of options that expire worthless represent only about 9% of all options that existed during the contract's life (i.e. 90% are closed prior to expiry, which leaves 10%, and out of those 10% 90% expire worthless, so that's 9% of the total).

Here's an extreme example. Suppose you sell a call option with a strike of 20, when the stock is at 15. The next day there's a takeover announcement and the stock jumps to 100. You now have a loss of 80 less premium received. You close out the short call and take the loss. Then just before expiry, the deal breaks down and the stock drops down to 19, which leaves the 20 call to expire OTM.

Now, does that really mean that sellers have an edge vs. buyers!?
 
Quote from crgarcia:

Margin at 9% equals paying 0.025% per day.

July 149 SPY Calls Ask: $4.40
have an theta (time decay) of: -0.031
This equals losing 0.70% per day, 28 times margin.

Which means:

Options writers have an edge over buyers.

If you buy options, buy them on margin, preferably portfolio margin. You get more leverage, losing less as time passes.

It's not surprising 90% of options expire worthless.
More...

This is a contrived example. Go ahead and write some July SPY 149 calls and let me know how it goes.

Also, portfolio margin does not give greater leaverage for buying options than reg-t. They are the same.
 
Quote from MTE:

Derivman,

The statistic that 90% of options expire worthless is always used by "hype people" as a reason why people should sell options rather than buy them as this somehow presents an edge.

Firstly, this is simply not true. There's no edge in selling options vs. buying them. We had several discussions on this topic here on ET so if you're interested then use the search to find them.

And, secondly, this statistic is only half-truth. As I have mentioned above, those that use this statistic always drop the part:"options that are held to expiry". That is, yes, about 90% of options that are held to expiry do expire worthless, but there's another statistic, which says that about 90% of options are closed prior to expiry. As result, it means that those 90% of options that expire worthless represent only about 9% of all options that existed during the contract's life (i.e. 90% are closed prior to expiry, which leaves 10%, and out of those 10% 90% expire worthless, so that's 9% of the total).

Here's an extreme example. Suppose you sell a call option with a strike of 20, when the stock is at 15. The next day there's a takeover announcement and the stock jumps to 100. You now have a loss of 80 less premium received. You close out the short call and take the loss. Then just before expiry, the deal breaks down and the stock drops down to 19, which leaves the 20 call to expire OTM.

Now, does that really mean that sellers have an edge vs. buyers!?
More...

Thanks MTE for the reply. If the 90% statistic is correct in relation to Options expiring worthless then why would one want to close out the Option prior to expiry. Is it because the trader has not done his homework correct and does not have a definitive decision as to where the market might be by expiry date, or is it something else. I fail to see why one would not use the statistics to ones advantage in trading. This reminds me of the bell curve and the Market Profile Techniques which are used on the S&P 500, where the price will deviate from the mean and then return to the mean. If you know there is a very good chance the price will return to the mean then surely you can use this to your advantage in trading the S&P 500. So, if you know that 90% of Options expire worthless, then surely you can also use this to your advantage in trading Options.Cheers.
Derivman
 
Quote from Derivman:

So, if you know that 90% of Options expire worthless, then surely you can also use this to your advantage in trading Options.Cheers.
Derivman
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I'm not sure you carefully read the explanation given by the other poster.

The premise you are alluding to as some kind of advantage has been debunked authoritatively many times before. It only requires simple arithmetic to understand why it is false yet it is perpetuated successfully for some unknown reason.

You are choosing to believe this 90% statistic is something you can take advantage of and that is your perogative. If you choose to sell these options then it only serves to drive down the price of them for those that wish to buy them.
 
Quote from TraderMojo:

I'm not sure you carefully read the explanation given by the other poster.

The premise you are alluding to as some kind of advantage has been debunked authoritatively many times before. It only requires simple arithmetic to understand why it is false yet it is perpetuated successfully for some unknown reason.

You are choosing to believe this 90% statistic is something you can take advantage of and that is your perogative. If you choose to sell these options then it only serves to drive down the price of them for those that wish to buy them.
More...

Thanks for the reply TraderMojo. Can you point me to the statistics you refer to as I have not come across them yet. I have seen many sites where there are statistics to support the 80% to 90% of Options expiring worthless, but I have not seen these stats been debunked by any site. Is it a Financial site you are talking about. Cheers.
Derivman
 
Quote from Derivman:

Thanks for the reply TraderMojo. Can you point me to the statistics you refer to as I have not come across them yet. I have seen many sites where there are statistics to support the 80% to 90% of Options expiring worthless, but I have not seen these stats been debunked by any site. Is it a Financial site you are talking about. Cheers.
Derivman
More...

The only statistics I referred to was that mentioned earlier in the thread.

If you want to debunk it you can do so yourself using your built in black box.

Just because the information is on a website does not mean it has any credibility. Even if it is a financial site, or rather, especially if it is a financial website.

Having said that, I hope the CBOE have some credibility in this area:

http://options2.registeredrep.com/myths/

If that wasn't definitive enough for you, maybe Lawrence McMillan has enough credibility for you:

http://www.traders.com/Documentation/FEEDbk_docs/Archive/012001/Abstracts_new/McMillan/McMillan.html

Lies, damned lies and statistics.
 
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