All over the Internet the option rhetoric is the same: 90 percent of options expire worthless. Others will claim that the figure is not as high as 90 percent, but possibly 70 to 80 percent. Where do any of these figures come from? Let’s look at the language of the research to see if there is a discrepancy between this statement and the statements of some the research studies that have been done regarding options.
The Chicago Board Options Exchange (CBOE) has been maintaining data on options since 1973. The CBOE’s researchers discovered a largely overlooked fact: that not all options are held until expiration. This is monumentally important when attempting to determine where figures such as 90 percent actually come from. The CBOE broke down option outcomes into a simple formula: 10/60/30. Ten percent of all options are exercised (converted to the underlying asset); approximately 60 percent of the options are closed (offset) before expiration; and the remaining 30 percent are held until expiration.
It is very likely that all of the remaining 30 percent of options actually expire worthless; the CBOE’s formula does not mean that 90 percent of all options expire worthless. In a study done by the Chicago Mercantile Exchange (CME), ranging from 1997 to 1999, the researchers decided to come to a definitive conclusion on the exact percentage of options that expire worthless. In their research they concluded that 76.5 percent of the options that were held until expiration expired worthless.
This is significant. If only 30 percent of options are held until expiration, and of those that are held until expiration 76.5 percent expire worthless, then the statement that “90 percent of options expire worthless” is not only false, but a bold-faced lie-a lie that has been perpetuated over and over until it has become a marketing fact. The idea of “options held until expiration” and “options expiring” have been merged into one monolithic idea that is simply comparing apples to oranges.
The fact that only 30 percent of options reach expiration does not mean that the remaining 70 percent of options are successful. We know that 10 percent of all options are converted into the underlying asset; this is a sign that 10 percent of all options are guaranteed to be successful. We also know that about 60 percent of options are offset before they ever reach expiration. Some of those are profitable and some are not profitable, but none of them have ever reached expiration. So where does the 90 percent figure come from?
It likely derives from the fact that only 10 percent of options are converted into their underlying asset. That means 90 percent of options aren’t converted into the underlying futures contract or stock. So undoubtedly the assumption is that if 90 percent of options aren’t converted then they must expire worthless. This is a false assumption that is simply not supported by the numbers. Even in the small percentage of options that do expire, 30 percent, some of these expire with a cash value (13.5 percent, according to the CME).
So while we know that the percentage of options that expire worthless is not 90 percent, there is reason to believe that a majority of options do lose money. With 50 to 60 percent of contracts being offset before expiration and the majority of options that reach expiration expiring worthless, the odds are in favor of 50 to 60 percent of options to be losing trades. While 50 to 60 percent is less than the touted 90 percent figure, selling options is still a promising opportunity.