How can it be possible that only ~10% of options expire worthless, and only ~10% are exercised?

Question

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.

So am I misunderstanding something here? What do they mean when they say 80% have the position closed, and how can it be that any less than 100% ultimately expire or are exercised?

Unless of course they're talking about the position rather than the option itself. In which case it would make more sense, since one option can take part in many positions as it is traded from one party to another.

Answer 1

Consider the futures market. Traders buy and sell gold futures, but very few contracts, relatively speaking, result in delivery. The contracts are sold, and "Open interest" dwindles to near zero most months as the final date approaches. The seller buys back his short position, the buyer sells off his longs.

When I own a call, and am 'winning,' say the option that cost me $1 is now worth $2, I'd rather sell that option for even $1.95 than to buy 100 shares of a $148 stock. The punchline is that very few option buyers actually hope to own the stock in the end. Just like the futures, open interest falls as expiration approaches.

Answer 2

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.

EDIT:

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.

Answer 3

You gave your own answer - the 80% is positions, not contracts.

Most actors on the option market have no interest in the underlying asset. They want "just" exposure to its price movement.

It makes more sense to close your position than to be handed over bushels of wheat or whatever.

Answer 4

Options have to come from somewhere. Someone "writes" an option, or sells the right to do a certain thing. If the writer of the option buys the option back, then the option effectively doesn't exist anymore.