70% of options expire pointless to the buyer! That means 70% expire profitable to the seller.Garbage! incredible garbage! Absolutely incredible garbage! The logic in this announcement is just pla...
70% of options expire worthless to the buyer! That means 70% expire profitable to the seller.
Garbage! amazing garbage! Absolutely unbelievable garbage! The logic in this declaration is just plain incorrect and of course the website does not have statistics to incite their claim.
To be fair this website was not the solitary place I have come across a declaration in the manner of this. I have in fact seen a figure of going on to 90% quoted. However even if it is a common belief does not create it correct.
Lets first have a think very nearly the logic, then lets look at some stats and arrive to some genuine conclusions.
Profit Logic
Lets agree to 70% of options reach expire worthless. How can anyone draw conclusions as to the profitability of a long trade or a quick trade? You helpfully cannot.
If you sell an substitute at tell 10pts, you could subsequently watch it go to 100 or 200pts and wipe out all the grant in your account. The shout out may after that incline nearly and eventually see the out of the ordinary expire worthless, but that does not want your trade has been profitable. This is not nit picking. This is real animatronics trading - things distress taking place and beside and you cannot always afford to sit on a face and hope for a zero value at expiry.
It is usefully not doable to magnetism a conclusion roughly profitability based on expiration statistics.
The statistics
In a stamp album entitled Options upon Futures by Summa and Lubow they quote the 80% figure and it is backed going on by numbers from the Chicago Mercantile dispute (CME).
In a section entitled The Numbers speak for Themselves, they perform a table of data sourced from the CME. The numbers represent the percentage of options that expire worthless. The data from the stamp album 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 explanation the doubt these statistics, later this seems to back up occurring the popular belief. upon cautious reading however, it appears the figures represent on your own those options that are held to expiration and not those that are closed out OR exercised since expiration (remember we are dealing in imitation of American style options here therefore some can be exercised before expiration).
Maybe we complete not have the combination picture...
I next came across some more stats from the Chicago Board Options squabble (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 surviving (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 realize not add together options that are exercised or closed previously expiry and thats 60-70% of every options according to the CBOE.
If we undertake both exchanges statistics as fact, subsequently drawing a conclusion from only the expiry numbers could be a bit biased.
Think practically the CBOE numbers for a moment. The 10% that are exercised in the future would in all but completely rare cases be in-the-money (why else would you exercise?) If we agree to so that only in-the-money options are exercised, later this would leave more out-of-the-money options heading to expiry than in-the-money.
What just about the options that are closed before expiry? One could hazard a guess that most options closed close expiry would be either in-the-money, at-the-money or just out-of-the-money.
Why? In-the-money options will take steps more and more behind the underlying the deeper they are in-the-money and the closer they acquire to expiration. Holding in-the-money options consequently will carry more risk. This could be a defense why some holders may desire to close their in-the-money positions prior to expiration. Out-of-the-money options on the new hand may be worth very little and sustain little risk (low delta/gamma/theta/vega). so you might tell there is larger fortuitous of an out-of-the-money complementary bodily held until expiration.
Therefore, the 50%-60% of options that the CBOE allegation are closed in the past expiration could after that be weighted towards in-the-money options. For the numbers below, we will bow to the split is 60-40% (60% in-the-money and 40% out-of-the-money).
So then, the majority of the 30-40% that go on to expiry would correspondingly be out-of-the-money and of course would expire purposeless in imitation of out-of-the-money options do. Does that try you should be a net seller? Does that intend 70% of options expire profitable to the seller?
Lets work taking into account some numbers. Lets say we have an argument considering 1,000 gate substitute contracts.
- First, 10% of the options (all in-the-money) are exercised further on leaving 400 in-the-money and 500 out-of-the-money. There are 900 options remaining.
- Then 55%* or 550 of the initial pool are closed out rejection 350 gain access to contracts. (* 55% is half pretentiousness in the midst of the 50-60% CBOE number.)
- Of these 550, we habit to estimate how many are in-the-money and how many are out-of-the-money. before we have conventional a weighing towards in-the-money options, lets allow 60% of these are in-the-money and 40% are out-of-the-money.
- In the end, we have 350 contracts run to expiration.
Based on our calculations, that would depart 70 in-the-money options and 280 out-of-the-money options that will run until expiration. (see table). Based on the one assumption above, 80% of the options that will go to expiry are out-of-the-money and therefore will expire worthless.
TOTALIn-the-moneyOut-of-the-money
1000500or 50%500or 50%
Early exercise (10%)1000
Remaining900400500
Closed positions (55% of 1000)550330220
Option to trade to expiry35070 or 20%280or 80%
So now the figures make sense. Perhaps 80% of options that control to expiry attain expire worthless. (Perhaps the real figure is 70% or 90%.) However that is not the same as axiom 80% of every options expire worthless. Can you look the difference? Furthermore, coming to the conclusion that is it improved to be a seller than a buyer from a single biased statistic behind this is plain nonsense.
In a subject following that of as options trading, it is simple to get caught stirring taking into account statistics, but if we assume the grow old to think and research past drawing conclusions, subsequently surely we will become augmented traders.
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