There is a Wall Street axiom that says "90% of all the options that are bought expire worthless". This means that 90% of the time the people who 'write' the option and collect the premium, never get their stock 'called' from them or get stock 'put' to them.
This is false. The great majority of option positions are closed in an offsetting transaction: i.e., someone who buys an option later sells it, or vice versa, closing the open contract.
This has also been called the theory of maximum pain or just Max-Pain, for short.
That's a terrible name, in my opinion. For one thing, it isn't particularly more difficult to write options than to buy them. If buying options is such a uniformly bad idea, who's actually doing the buying? An endless supply of suckers? And if writing options is such a good deal, why doesn't everybody do it? And then, why not call the theory Max-Gain?
You're absolutely right, though, about the effect on the price of the underlying security: the unwinding of in-the-money option positions (either calls or puts) as expiry approaches tends to push the price of the underlying security toward the strike price of the option. By looking at open interest in in-the-money options, it is possible to calculate the price that options expiry is going to push the underlying security toward. You're also right that this effect is easily overwhelmed by larger forces (market sentiment, earnings, etc.). |
