Do 80% of Options Expire Worthless?

Do 80% of All Stock Options Expire Worthless? What Does It Even Mean?

Red Alert! 80% of Options Expire Worthless!

"80% of options expire worthless! This is why in order to be on the winning side in options trading, you need to pay thousands to learn how to write options instead of buying options!"

I am sure almost all of you have heard preachings such as the one above from options "gurus" selling their options writing programs and seminars. What they are saying is that 80% of options bought expired worthless and therefore buying options is a loser's game. In order to become a winner in options trading, you need to start playing "banker" and sell options to these silly options traders who are buying options, just like being a banker in a casino.

However, is that really what's happening in the options market? Do 80% of all options REALLY expire worthless? Are 80% of all options buyers automatically losers which makes 80% of all options writers automatically winners in the options market without any risk? We shall explore this long held options trading myth in depth and seek to blow the myth skyhigh to uncover the truth.

What Does 80% of Options Expiring Worthless Mean?

So, what exactly is this myth suggesting? What this options trading myth is trying to suggest is that firstly, if you are buying options, you have at least an 80% chance of losing that money you invested. Secondly, this means 80% of the population of options buyers are actually losers. Thirdly, options traders are buying options only for directional speculation. What this myth is trying to say is that there is no other purpose to options trading except for directional speculation and that you are almost automatically a loser when you buy options. On the other hand, what this myth is also suggesting is that if you are selling options, you become the "bookmaker", you become the "house", and that you automatically have an 80% chance of winning selling options to those silly options traders buying options for only 20% winning chance.

An experienced or educated options trader can immediately tell the fallacies of these suggestions.

First of all, whether you are buying or selling options, it is the movement of the underlying stock that determines if the option goes in the money or expires worthless! It doesn't mean that when you buy options, the underlying stock automatically gets into a strange automatic conspiracy to try to get you out of the money 80% of the time. It also doesn't mean that when you sell or write options, the underlying stock automatically acts in your favor 80% of the time to take your position out of the money! The price movement of the underlying stock is largely independant of its options trading so it does not move according to how its options are selling. No matter if you are buying or selling options, the price of the underlying stock moves independantly of what you do, moving only due to complex fundamental and technical reasons. It does not automatically move against or in your favor... the stock market doesn't revolve around what you are doing unless you are George Soros or Warren Buffett!

Secondly, the myth seems to suggest that expiring in the money automatically means a win for options buyers, which isn't true. If you buy a deep in the money option and the underlying stock moves against its favorable direction, your options would still end up losing money even if it is still in the money by expiration! Ultimately, it is the direction of the underlying stock that determines if you end up profitable. In this case, since the myth suggests that only 20% of all options expire in the money, coupled with the fact that not all options traders holding in the money options by expiration are profitable, wouldn't that suggest an almost sure lose scenario for options buyers? If that is the case, why are anyone, including Market Makers, still hold long positions in options?

Thirdly, the myth seems to suggest that options buyers are buying only for directional speculation and that expiring worthless is automatically a bad thing. The myth conveniently forgot that options, as a hedging tool, is also bought with the intention of allowing them to expire out of the money! Examples of such options trading strategies include " Protective Put" and " Protective Call" where put options and call options are bought in order to act as "insurance" for existing stock portfolios. Also, options are also used as part of options spreads! Some options in an options spread are designed to expire worthless! As such, expiring worthless isn't always a bad thing for options buyers using options for hedging purpose (read about all the different options trading styles!).

Do 80% of Options Really Expire Worthless?

So, since this widespread options trading myth that "80% of all options expire worthless and therefore only losers buy options" doesn't make any sense, what is the reality in the options market? How much options did expire worthless? Under what conditions did these options expire worthless? What happened to the other options that did not expire worthless?

Well, the statement needs to be restated from "80% of all options EXPIRE WORTHLESS" to "More Than 80% of all options are NOT EXERCISED" in order to reflect the truth.

That's right! Instead of 80% of all options actually being held all the way to expiration and then expiring out of the money, the truth is that approximately 80% of all options positions are actually NOT EXERCISED. Now, not being exercised is not the same as expiring out of the money! The myth comes from ignorant options "gurus" who automatically assume that any options that are not exercised are deemed to have eventually expired out of the money, which is not the case in reality! Options that are not exercised can have three outcomes; expiring out of the money, closed out before expiration or exercised before expiration. So, more than 80% of options not being exercised doesn't mean they all expired out of the money. They are a combination of all three outcomes!

In fact, recent data from the Chicago Board Options Exchange (CBOE), the governing body for options trading in the United States, suggests that actually only about 10% of all options were exercised (most options traders buy options to trade them, not to exercise them for the underlying stock at all, hence the low figure), more than 60% were closed before expiration (again, most options traders buy options to trade them, not to hold them all the way to expiration) and only about 30% actually expire worthless!

Myth Busted!

The truth actually is that "Only About 30% of all options expire worthless". So, how does that sound for those people thinking that writing options automatically puts the odds in their favor?

Lets also not forget that a good portion of those 30% that expire worthless are MEANT TO EXPIRE WORTHLESS due to using options for hedging purpose instead of directional speculation.

What Does It Mean To Options Traders If Only About 30% of Options Expire Worthless?

Here's the shocking truth... this statistic means almost NOTHING to options traders whether they are hedging using options or using options for directional speculation! It doesn't mean that when you buy options, you automatically have 70% chance of winning, it also doesn't mean that if you write options, you only have 30% chance of winning. Why is that so? There's a few reasons:

1. More than 60% of all options are closed before expiration! Whether in directional speculation or hedging, options traders typically close out their positions in order to take profit or roll forward before expiration. Either scenario could be a winning or losing scenario so it doesn't tell you your chances of winning or losing at all. In fact, not all options writers hold profitable positions through expiration. They could have written an option and chose to close it profitably as expiration approaches instead of risking any disfavorable moves on expiration day itself which may take all the profit away. That's right, even short options positions need not be held through expiration in order to turn a profit.

2. The 10% options that are exercised for the underlying stock could be done for various complex reasons including accounting purpose (for large professional funds) and dividends arbitrage. It doesn't mean that they are exercised because they are winners because, as mentioned above, that you can have an in the money options position which is losing money.

In conclusion, this is one piece of statistic that is completely useless to options traders and might only be interesting to market regulators who need to know the status of all options traded. As such, you should not allow this piece of information to steer you into becoming an options buyer or options seller. The only way to determine which options strategy suits you is by really learning about them, their reward risk ratios, practising them and understanding which approach best conforms to your investment objectives, trading style and risk appetite. Options is risky no matter if you are an options buyer or seller, don't let anyone tell you otherwise. There is no such thing as becoming "banker" in the options market. Understand the risks of options trading.

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