While researching stock options, I have read in many places that options meet the following ends with the following frequencies:
~10% expire worthless
~10% are exercised
~80% are traded away; the position is closed.
How is this possible? If an option is traded away, the subsequent owner must then make the same choice: let it expire, exercise it, or trade it away. Which is to say, since all options have an expiration date, that ultimately 100% of them must expire or be exercised. "Traded away" is only an interim step to one of those finalities.
No, that is not correct. According to OCC, in 2017 the break down for activity in customer and firm accounts was::
Closing Sells - 69.7%
Exercised - 7.0%
Long Expirations - 23.3%
Open Interest (OI) is the number of option contracts outstanding. In order for OI to increase, both parties must be taking opening positions. In order for OI to decrease, both parties must be taking closing positions. So if I buy to close a call that you are selling to close, OI drops by 1 and that contract disappears from existence. Such transactions would fall in the "Closing Sells" category.
None of this has anything to do with "positions". A position means one or more option contracts. No one keeps track of that.
"Traded away" applies to contracts where one party is opening the position and the other party is closing. These are just a transfer of ownership until the 3 events listed occur.
Many promoters on the internet claim that people should write options because the preponderance of them (75%) expire worthless. Some claim that the number is even higher. So if most options will expire worthless, why not collect money from them while having probability in your favor?
Since OCC data indicates that 23.3% of options expired in 2017, how can the 75% claim be true? Well, it isn't.
As an example, assume that in the life of its existence, an option had an open interest of 100. Prior to expiration, 70 contracts are closed.. That leaves an OI of 30 at expiration. If 7 are exercised and 23 expire worthless, then 77% of the open interest at expiration expired worthless. But in reality, over the existence of the option, only 23% of the options expired worthless.
So yes, a high percentage of the open interest that remains at expiration day expires worthless. But that's a very different statistic than 75% of all options expire worthless.