May 3, 2023

Options Expiration vs. Exercising Options: Common Misconceptions

If you have spent any time researching trading schools or trading signal services, you undoubtedly have come across many that claim that buying options is a proposition that loses up to 90% of the time and thus you should always take the other side and sell options.  Sound great right?  Problem is that these claims are based on false premises.  Here is just one of the quotes I have found out there:

 “Over 75% of all options held until expiration expire worthlessly . . . That’s why you should do what the pros do and sell options to other people. After all, if most of them will expire worthlessly, why not collect some money for them today while they still have value?”

Here’s how the numbers break down according to the OCC (Options Clearing Corporation):

According to historical OCC statistics for the year 2015 (for activity in customer and firm accounts), the breakdown is as follows: 

  • Position closed by selling the option: 71.3%
  • Exercised: 7.0%
  • Held and allowed to expire worthless: 21.7%
This data from the OCC is accurate. So why do so many people believe that 90% of options expire worthlessly? Basically, it is a mistake in logical thinking.
 
It’s worth noting that open interest is measured only once each day. Let’s look at a simple example: Assume that a specific option has an open interest (OI) of 100 and that 70 of those options are closed prior to expiration. That leaves an OI of 30. If 7 are exercised and 23 expire worthless, then 77% of the open interest (as of the morning of expiration day) expires worthless. Those who do not understand this subtlety claim that so much of the open interest expires worthless.
 
The important thing to remember is that buying options have its time and place and selling options have its time and place.  Painting yourself into one corner or the other is a fool’s errand.
 

about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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