Options Myths

[Trader.NET]

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.

More info @ http://options2.registeredrep.com/ar/finance_19/

 

[TGregg]

Heh, I almost fell for that myth. I read that stat and thought to myself "Well sh!t, there's an obvious strategy." Upon further research, it didn't work as well as I thought.

 

[aphexcoil]

Quote from Trader.NET:

Note that 90% of options go unexercised, which is very different than expiring worthless.

So 9/10 options that are worth something are disregarded by people who own them? Shit, we should be so lucky!!!

 

[Hungry4Knowledg]

Quote from Trader.NET:
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.

More info @ http://options2.registeredrep.com/ar/finance_19/

I kept reading that "fact" (95% of all options expire worthless) on ET and other places and decided that would be an outstanding moneymaker. However, after a few minutes of research earlier this year, I quickly found roughly the same stats as you have posted here. Like they say, "If it sounds too good to be true, it probably is."

 

[peppermint]

I think McMillan says it's about 50/50. Look at it this way, when option strikes are created, there are usually the same number of strikes on either side, both puts and calls. How can 90% expire worthless? They can't. However, since every option does suffer from time decay, it might seem more profitable to sell rather than buy as an overall strategy. I think the 90% figure is marketing hype from firms trying to reel in new, um, "customers."

 

[EliteThink]

I agree, the 95% statement is clearly false. But selling options is still the smoothest equity curve I've ever seen.

 

[vulture]

Quote from EliteThink:

I agree, the 95% statement is clearly false. But selling options is still the smoothest equity curve I've ever seen.

I think that is a pretty bold statement...I would say selling options in an inflated implied volatility environment is the smoothest equity curve one would see...But when you find yourself in strongly trending markets and implied volatility is in a nose dive, its not all that easy or comfortable...