Do Option Sellers Have a Trading Edge?
by John Summa,CTA, PhD
While there are certainly many viable options-buying strategies available to traders, options expiration data I obtained from the CME covering a three-year period suggests that buyers are fighting against the odds. Based on data obtained from the CME, I analyzed five major CME option markets - the S&P 500, eurodollars, Japanese yen, live cattle and Nasdaq 100 – and discovered that three out of every four options expired worthless. In fact, of put options alone, 82.6% expired worthless for these five markets.
Based on a CME study of expiring and exercised options covering a period of three years (1997, 1998 and 1999), an average of 76.5% of all options held to expiration at the Chicago Mercantile Exchange expired worthless (out of the money). This average remained consistent for the three-year period: 76.3%, 75.8% and 77.5% respectively, as shown in figure 1. From this general level, therefore, we can conclude that for every option exercised in the money at expiration, there were three options contracts that expired out of the money and thus worthless, meaning option sellers had better odds than option buyers for positions held until expiration.
Figure 1 – Source: CME Exercised/Expired Recap For Expired Contract Report
We present the data as options exercised versus those expiring worthless. Figure 2 contains the actual numbers, showing that there were 20,003,138 expired (worthless) options and 6,131,438 exercised (in the money) options. Futures options that are in the money at expiration are automatically exercised. Therefore, we can derive the total of expired worthless options by subtracting those exercised from total options held to expiration. When we take a closer look at the data, we will be able to spot certain patterns, such as how a trend bias in the underlying affects the share of call options versus put options expiring worthless. Clearly, however, the overall pattern is that most options expired worthless.
Figure 2 – Source: CME Exercised/Expired Recap For Expired Contract Report
|Figure 3 – Source: CME Exercised/Expired Recap For Expired Contract Report|
As for call options, a primary bull market trend helped buyers, who saw 843,414 call options expire worthless compared with 587,729 expiring in the money -clearly a much better performance by option buyers than put buyers. Eurodollars, meanwhile, had 4,178,247 put options expiring worthless, while 1,041,841 expired in the money. Eurodollar call buyers, however, did not do much better. A total of 4,301,125 call options expired worthless while just 1,378,928 ended up in the money, despite a favorable (i.e. bullish) trend. As the rest of the data in this study shows, even when trading with the primary trend, most buyers still ended up losing on positions held until expiration.
|Figure 4 – Source: CME Exercised/Expired Recap For Expired Contract Report|