Haven't You Wondered?
How Many Options Actually Expire Worthless?

by Lawrence G. McMillan

It's a good question. And this options expert gives us the answer.

There is a great myth that the majority of options expire worthless. Numbers as high as 90% have been thrown about without any substantiation. As it turns out, such numbers are gross exaggerations. Further, it's not just harmless, incorrect information, for it may lead unknowing option traders into the wrong strategies.

FIGURE 1: MONTHLY STOCK OPTION EXPIRATION. Data shows that usually 60% or more of all options expire with some value, contrary to common opinion.

Having been an arbitrage trader for a number of years -- and hence having had a large number of both put and call options in position at every expiration during those years -- the rumors of how many options expired worthless seemed way too high to me. So beginning November 1999, I started keeping specific track of just how many options expired worthless each month. To do this, I used the final bid-ask quote of the option on expiration day. If there was a bid of at least 5/8 point (0.625), then I considered that option as not having expired worthless. The reason I used 0.625? It is the amount by which an option must be in-the-money in order for the Options Clearing Corp. (OCC) to automatically exercise it.

The specific monthly figures can be seen in Figure 1. The bottom line is that, during this period, about 68% of all options expired with some value! So only about 32% expired worthless -- a far cry from the preposterously inflated figures that are often bandied about.

In an attempt to verify these figures, mostly because I only used one year of back data, I asked the CBOE if it had comparable figures regarding expiration. According to its data, which stretches all the way back to 1973, the same conclusions were drawn: only about 30% of all options expire worthless. The rest are either exercised or closed out in the secondary market.

Thus, nearly 70% of all options expire with some value. Does this mean that an option buyer will make money nearly 70% of the time? Of course not. Just because an option is in-the-money at expiration does not mean that it represents a profit to the option buyer. But it doesn't represent a worthless option, either.

Lawrence G. McMillan is currently president of McMillan Analysis Corp. and publishes the "Option Strategist" newsletter as well as a daily fax service -- "Daily Volume Alerts" -- which selects short-term stock trades by looking for unusual increases in equity option volume. He may be reached via his Website, www.optionstrategist.com.

Excerpted from an article originally published in the January  2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.

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