Seven Options Myths Debunked
By Stock Options Channel Staff
Myth #1: Most Options Expire Worthless
A common claim is that 90% of options expire worthless, and that therefore it is better to be a seller of options than a
buyer of options. This claim misstates a statistic published by the Chicago Board Options Exchange (CBOE), which is that only 10%
of option contracts are exercised.
But just because only 10% are exercised does not mean the other 90% expire worthless. Instead, according to the CBOE, between
55% and 60% of options contracts are closed out prior to expiration. In other words, a seller who sold-to-open a contract
will, on average, buy-to-close it 55-60% of the time, rather than holding the contract through to expiration.
So if 10% of options contracts end up being exercised, and 55-60% get closed out before expiration, that leaves only 30-35% of
contracts that actually expire worthless. The big question is: of the 55-60% that get closed out before expiration, how often
did the option seller profit, and how often did the option buyer profit?
Much of the answer would depend on the movement of the underlying stock(s). In a simplified example, pick any of the Dow
components and suppose that from this day forward through expiration, the stock flatlined, neither moving up nor down. Any
options out of the money would end up expiring worthless, and therefore the sellers of those options (both on the puts
side and the calls side) would be the ones cheering their profits. Now suppose instead that we look at all of today's
out-of-the-money options in the scenario where tomorrow the stock jumps substantially and stays at those high levels until
expiration. In that scenario, the puts that had been out of the money (and even some that had been in-the-money) would expire
worthless, but a lot of the calls that had been out-of-the-money would now be in-the-money and the call buyers (not
the sellers) would be
cheering their profits. As a third scenario, suppose we look at all of today's out-of-the-money options if the stock were to
fall tomorrow on some catastrophic news. In that scenario, the calls that had been out-of-the-money (and even some that had
been in-the-money) would expire worthless, but a lot of the puts that had been out-of-the-money would now be in-the-money and
the put buyers (not the sellers) would be cheering their profits.