Thought I would add a few comments on options late on a Friday night...rather...early on a Sat. morning.
Have been around this game for some twenty plus years and think much is misunderstood about options.
The "90% of options expire worthless theory"---This is probably true mathematically (I never added them all up <gg>) . But consider this: What ratio of put or call options purchased are in-the-money when initiated versus out-of-the-money? I know of few clients who ever purchase deep in-the monies. (I am not a big option player or advocate-- but am a Series 4 options principal at a licensed firm and review thousands of option trades per/month so I know what the public tends to do). Almost all buy at or out-of-the-monies. Why? Most put and call Buyers are speculators and want the leverage. Also, at some point, deep in-the-monies become so expensive that margin is preferable even with the interest cost. So, assume that the majority of all puts and calls purchased are initiated out-of-the-money (therefore no intrinsic value to begin with) and you are much closer to understanding why most puts and calls purchased expire worthless. Toss in all the hedged positions (spreads, straddles etc.) where it is a foregone conclusion that at least 50% of position expires worthless and we get closer. Just one observers opinion.
The Max Pain theory----
I am not really convinced of this massive conspiracy by MM's to close these stocks on strikes based on open interest etc. I just punched up 10 symbols and found none closing on the strike. Also, options do not actually expire until Sat., therefore, any after market news, price change, earthquake, nuclear war etc. that might tip off a player as to Monday's direction, would allow him to exercise even an out-of -the money position if he so chose. (happened recently on some CPQ 25 puts I sold---stock closed around 25 1/8 and come Monday stock was put to client at 25.).
I'm sure there is some compelling evidence on this....I am just not convinced at this juncture or maybe I am not all that familiar with what the theory suggests....in other words...I am open minded on this....
Lastly, in reviewing active options accounts on a monthly basis, I can tell you that very few speculators make money buying out-of-the-money puts and calls. On accounts where I gauged performance, I can tell you that I found one speculator who broke even. All other accounts lost. Put sellers and covered writers (same risk/reward metric) made money. Almost all of them profitable. The 'strategy gang' (straddlers, spreaders etc.) tend to profit as well if they utilize 'credit' strategies. The 'debit' gang tend to lose but not that much.
Oh, finally, always avoid the old ALLIGATOR SPREAD-----
That's the one where the client can't lose money....the client can't make money but gets eaten alive by commissions. <gg> (old broker joke)
Best of luck in your trading and please don't take my comments as advice. They are just insights from my side of the fence if you know what I mean. |
