I’m fascinated by the lack of peoples’ knowledge when it comes to the stock market and in particular the Options market. I see it all the time. This is a recurring argument and one that has become a pet peeve of mine. In fact, it just surfaced once again with people asking me so I thought I would add a post on my website and I’m sure that in the future I can refer people here to save the wear-and-tear on my computer’s keyboard.
The argument typically goes that it is better to sell options on their own and the reasons offered to support this pathetic statement often include a reference to the “fact” that 80% and some even say 90% of options expire worthless. This, of course, is rubbish.
In fact, the Chicago Board Options Exchange ranks it as the #1 options myth in their Options Adviser’s Knowledge Centre. So, I guess it’s not just me. Seems to be a rather popular piece of misinformation from people who have no idea about the stock market and the Options market.
Lets look at the FACTS!
The truth is that majority – we’re talking 50% or more – of options are closed before expiration. Option buyers sell their options and option sellers buy-to-close their short positions. What’s also true is that about 20% of options end in assignment. According to the CBOE, only about 30% expire worthless.
So, where does this myth come from that 90% of options expire worthless and why does it keep cropping up? The best explanation I can offer is that it comes from flawed reverse logic; i.e., if 20% of options are assigned then that must mean that 80% of options expire worthless. But, if we can so easily disprove this statement why does it continue to be repeated?
The cynic in me says that it is perpetuated by those who want to sell their version of an option selling strategy and tell their prospective clients “the odds are dramatically in your favour because…(wait for it)….80% – 90% of options expire worthless.”
While I have little doubt there is some of that out there, I also think that this statement gets passed around by those uneducated traders who are working hard trying to understand options and formulate a reliable method of generating profits routinely.
Selling out-of-the-money options does offer a nicely positive probability of success and statements like that pet peeve of mine above, only reassure them that they are right to be an option seller, writing Naked Options. The odds are in our favour! Right? Well, yes. But, there is a ying to that yang and a zig to that zag.
Let me explain. Options represent balance between risk and potential reward. The more we push the probabilities to our favour by, well say, selling out-of-the-money options Naked, the more we increase our potential risk and reduce the possible reward. This is why I favour Covered Calls with Fokas Beyond compared to those out there who are uneducated making false claims to be earning in excess of $30,000 a month consistently and have done so for the last x amount of years only to be still generating $30,000 or so a month now. Surely they have heard of compounding and that their returns would now be well over $200,000 a month if they were generating at the beginning $30,000 or so a month x amount of years ago…RIGHT?
So, there is no inherent edge to be gained simply by the act of selling options versus Covered Calls. The best part of Covered Calls is I own the underlying ASSET!. THE STOCK.
Naked Writing is RISKY!
As you evaluate option strategies keep in the back of your mind that you need to give something up in order to get what you’re after. If you want a high probability of success, you’re going to have to shift that risk-reward equation against you. Welcome to Naked Options / Naked Writing / Naked Insurance / Naked Calls and Naked Puts. All these fancy names and no one really wants to use the correct terminology. Naked Calls and Naked Puts is the correct terminology.
Sorry if I burst a bubble. So lets make sure that the uneducated who claim that 80% or 90% of Options expire worthless, now have the FACTS!
It should also be noted that this says nothing about profitability. Option positions closed prior to expiration may be profitable or unprofitable. Options that expire worthless may not be unprofitable if they were part of a strategy that involved other securities such as covered call writing. For more information on this phenomenal Covered Call strategy where you earn an income up front, visit us, http://www.fokasbeyond.com.
Yours in Abundant Success
George Fokas
Investor | Global Wealth Mentor | Educator | Key Note Speaker
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