Why 90% of options expire worthless?

You may have heard this claim before but it’s actually a misconception. The truth is approximately 55-60% of all contracts are closed prior to expiration and only about 30-35% actually expire worthless according to the CBOE. The confusion stems from the fact that only about 10% of all options are exercised at expiration.

Whenever you purchase an option you should ask yourself, what your expectation is, particularly if so, many options expire without much value. Everyday you hold onto an option it loses value as a buyer. Theta is the enemy of option buyers. There are ways to reduce theta’s affect such as writing spreads or becoming the option seller. These two methods drastically increase option’s traders’ odds but will reduce the potential gain in a trader’s position.

If you prefer to be a speculator it’s a good idea to understand what you expect a trade to do before you enter. It’s critical to your success to formulate this plan. Identify your entry, stop-loss and profit targets before you ever make a purchase. This will help you determine when to lock in your gains and cut your losses so that you don’t end up letting your profits fade away or get stuck in a losing trade. 

As speculators we also want to be sure we are buying the right options. Delta is usually a good way to determine this as delta is not only the amount of money your option will gain/lose in value per $1 move in the underlying but is also a calculation of the probability that option expires in the money.

Market makers price options with an expectation of price movement. They do this by calculating and predicting future volatility in IV. IV is typically represented as a % but can also be displayed as a $ value on the option chain. This IV will tell you how much of a move is already priced into the stock we are trading in the time frame the option has until expiration.

If the option is OTM and a very small move is expected to occur that option has a higher probability of expiring worthless than an ATM or ITM contract. As speculators we want to increase our probabilities of success and not reduce them so when we are getting ready to make a purchase it’s important to remember. Sellers have the advantage, so we want to be buying options that work in our favor and not against us.

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