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I've read multiple times that options are rarely, if ever, exercised, and 90+% usually expire into nothingness.

If that's the case, wouldn't you always want to be an option writer? If nobody is ever actually going to exercise the contract, why would you care whether the value of the contract went up or down. Just collect the premium you get after writing the option and don't worry about it ever being exercised since it'll expire into nothingness anyways.

I want to sell options so I can do all the popular option strategies, but I'm too scared on ever being called to exercise the option.

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    Please don't trade options. You will just lose money. – TheMathemagician Feb 6 '18 at 11:12
  • @TheMathemagician Agreed - this statement is particularly concerning: "I want to sell options so I can do all the popular option strategies". To me, this says that the OP is not informed enough (yet?) to get into specific investment decisions like this. – Grade 'Eh' Bacon Feb 6 '18 at 14:29
  • If it was always profitable, why wouldn't everyone be doing it? By selling options, you are effectively selling insurance. Sometimes the premium is worth the risk and sometimes it isn't. Can you figure out which is which? – zeta-band Feb 6 '18 at 17:07
  • If you had a market where 90% of options expire into nothingness, that would mean that people are only buying options to protect themselves from very unlikely, very expensive contingencies. That would make this like a reverse lottery where 90% of the time you make $1 but 10% of the time you lose a LOT. – David Schwartz Feb 13 '18 at 22:31
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Many web sites state that "90% of options expire worthless." That is categorically FALSE. The majority of options do not expire worthless. As per stats provided by the CBOE:

1) About 10% of options are exercised (gain or loss)

2) About 60% are closed before expiration

3) About 30% expire worthless

90% of options go unexercised which is very different than expiring worthless. 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 (covered calls, spreads, hedged long or short stock, etc.).

Many people also incorrectly state that since option writers make money in 2 out of 3 scenarios, selling them is more profitable than buying them. Short options have a higher probability of making a small profit and a smaller probability of losing a lot. Long options are the exact opposite (low probability of a larger gain with higher probability of a small loss). When you look at the expected return, there is no inherent advantage to one over the other. What makes money is above average timing and selection along with good risk management.

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Most of the options that don't get exercised are the ones that expire out of the money, because if you did exercise them you would get a worse deal than buying or selling the shares (or other underlying) directly.

You do know that if you write options and the price moves against you and they are in the money before expiry, you can buy the options back to close your position. If you are going to trade options this should be part of your risk management.

  • "Most of the options that don't get exercised are the ones that expire out of the money", But don't most options, even those In-The-Money almost always expire into nothingness because the person holding the option would generally make more money selling it again vs exercising. – HappyTurtle Feb 6 '18 at 4:30
  • "You do know that if you write options and the price moves against you and they are in the money before expiry, you can buy the options back to close your position." I still get scared that someone will exercise it while I'm at work or something, and theres no way I could actually afford for someone to exercise a call/put option against me haha. – HappyTurtle Feb 6 '18 at 4:34
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    If you don't have the wherewithal (the cash) to back up an exercise, you shouldn't be monkeying around with naked options. If you want to play the sell premium game, consider vertical spreads so that there's a floor under you that limits the loss. It's a R?R trade off - somewhat lower premium received for a large reduction in risk. – Bob Baerker Feb 6 '18 at 4:51
  • @HappyTurtle - then you should consider only trading European-style options which may be exercise only at expiration. If the option is in the money at expiry, that means that the buyer can make a profit by selling the options or by exercising it for the underlying. If there is profit then the end owner will exercise it. – Victor Feb 6 '18 at 4:53
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    The risk for a credit vertical spread is the difference in strikes less the premium received with the premium being the potential profit. If it's a debit spread then the risk is the debit and the potential reward is the difference in strikes less the premium paid. Since you are long one option, if assigned on the short leg, you can exercise the long leg. With all due respect, you have a lot of learning to do before you attempt any of this. Tread carefully :->) – Bob Baerker Feb 6 '18 at 5:26
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Buyers

Buying an option is a hedging strategy. Say your company makes frozen dinners. You buy freshly slaughtered chickens daily. However, you make agreements with grocery chains to sell them so many dinners at such and such a price. If the price of chickens increases, you might lose money fulfilling their orders. So you buy an option to buy chicken for whatever price makes sense (usually enough to avoid losing money but not to offer much profit).

In this scenario, selling an option does not make sense. You aren't trying to make a profit. Your goal is to avoid being squeezed between current chicken prices and your contracted price with your customers. You want the guaranteed price, not money.

From your perspective, it's fine if you only exercise the option one in ten times. It's better to pay a small fee and avoid a huge cost in that one of ten times. You can sleep easily knowing that you won't have to pay a ridiculous price for chicken six months from now. You've shifted your risk to the seller of the option.

Sellers

Why not just sell an option? Because one in ten times, you will have to fulfill the option. And by the nature of things, your risk is open-ended. If the difference between the option price and the actual price is ten times your original fee, you lose enough money to require nine more options at the same fee to make up.

Yes, 30% of the time the option is free money. 60% of the time, you take a moderate profit or loss. 10% of the time, you take a huge loss. It's like playing roulette in reverse.

Selling an option is safest if you have it covered. For example, you might raise chickens. So selling the option for someone to buy a chicken in six months is just getting some of your money now rather than waiting until the chicken is grown. You then use the money to pay down some of your debt, saving interest for the six months.

If you do not have the option covered, then you are vulnerable to a big loss.

Casual investing

Options are not a casual investment. If you buy or sell a bunch of them, you will not necessarily make money over time. It is quite possible to go bankrupt trading options. Sure, if you could then (after going bankrupt) get together enough money to buy into the market again, then you could make a killing as prices are low. But you don't have that money. You just went bankrupt. You're broke.

Stocks (and bonds) are much safer than selling options. At worst you lose the money you invested. That's not great, but it's not so bad either. And if you spread your money around, then the chances of losing all your money is low. Far more likely is that one stock tanks while twenty others in your portfolio gain. Or your stocks lose value now but gain it back in five years. And meanwhile, if you are investing continuously, your new investments get the cheap prices for a while.

  • That's a nice folksy way of describing options. You made a lot of valid points but you also jumped to a lot of conclusions which are misleading and incorrect. The most egregious is that "Stocks (and bonds) are much safer than selling options." A CD is safer than all of them but the appropriate comparison is stocks versus its options. For example, on a 1:1 basis, a put seller will ALWAYS lose less than the outright buyer of the stock. Risk advantage? The put. – Bob Baerker Feb 6 '18 at 13:12
  • Another example? Buying a high delta/low implied volatility LEAP call (Stock Replacement Strategy) has an almost similar profit potential as the stock yet it has far less risk if the underlying collapses. Risk advantage? The call LEAP. And the going bankrupt story about trading options is nonsensical. There are more issues but I'll stop there due to the space limitation of comments. – Bob Baerker Feb 6 '18 at 13:13

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