I recently read
following statement on a website that sells an expensive option trading system:“70% of options expire worthless to buyer! That means 70% expire profitable to seller.”
Garbage! Unbelievable garbage! Absolutely unbelievable garbage! The logic in this statement is just plain incorrect and of course website does not have statistics to back their claim.
To be fair this website was not only place I have come across a statement like this. I have in fact seen a figure of up to 90% quoted. However even if it is a common belief does not make it correct.
Let’s first have a think about logic, then let’s look at some stats and come to some real conclusions.
Profit Logic Let’s assume 70% of options do expire worthless. How can anyone draw conclusions as to profitability of a long trade or a short trade? You simply cannot.
If you sell an option at say 10pts, you could then watch it go to 100 or 200pts and wipe out all money in your account. The market may then turn around and eventually see option expire worthless, but that does not mean your trade has been profitable. This is not nit picking. This is real life trading - things move up and down and you cannot always afford to sit on a position and hope for a zero value at expiry.
It is simply not possible to draw a conclusion about profitability based on expiration statistics.
The statistics In a book entitled Options on Futures by Summa and Lubow they quote 80% figure and it is backed up by numbers from Chicago Mercantile Exchange (CME).
In a section entitled “The Numbers Speak for Themselves”, they show a table of data sourced from CME. The numbers represent percentage of options that expire worthless. The data from book is as follows:
YearCME optionsS&P optionsS&P putsS&P calls 199776.381.794.154.8 199875.882.293.143.9 199977.584.794.566.7 1997-9976.683.394.055.3
Assuming we have no reason doubt these statistics, then this seems to back up popular belief. On careful reading however, it appears figures represent only those options that are held to expiration and not those that are closed out OR exercised before expiration (remember we are dealing with American style options here so some can be exercised before expiration).
Maybe we do not have whole picture...
I also came across some more stats from Chicago Board Options Exchange (CBOE) that I thought were interesting. Their figures are: •Approximately 10% of options are exercised; •50-60% of options positions are closed prior to expiration; •The remaining (about 30 – 40%) are held to expiry.
At first these figures might look rather contradictory, but they are not. The CME numbers are based on options that are held to expiry. That is they do not include options that are exercised or closed before expiry – and that’s 60-70% of all options according to CBOE.
If we take both exchange’s statistics as fact, then drawing a conclusion from only expiry numbers could be a bit biased.
Think about CBOE numbers for a moment. The 10% that are exercised early would in all but very rare cases be in-the-money (why else would you exercise?) If we assume therefore that only in-the-money options are exercised, then this would leave more out-of-the-money options heading to expiry than in-the-money.
