All over the Internet, the rhetoric of options is the same: 90% of options expire worthless. Others will claim that this number is not as high as 90%, but maybe 70-80%. Where do these numbers come from? Let's take a look at the research language to see if there is a gap between this statement and the statements of some of the research studies that have been done regarding options.
The Chicago Board Options Exchange (CBOE) has maintained data on options since 1973. CBOE researchers have discovered a largely overlooked fact: Not all options are held until expiration. This is of monumental importance when trying to figure out where numbers like 90% actually come from. The CBOE broke down the results of the options into a simple formula: 10/60/30. Ten percent of all options are exercised (converted to the underlying asset); about 60 percent of options are closed (cleared) before expiration; and the remaining 30 percent is kept until expiration.
It is very likely that the remaining 30 percent of the options actually expire worthless; the CBOE formula does not mean that 90% of all options expire worthless. In a study by the Chicago Mercantile Exchange (CME), ranging from 1997 to 1999, researchers decided to come to a definitive conclusion about the exact percentage of options that expire worthless. In their research, they concluded that 76.5% of options held until their expiration expire worthless.
It is significant. If only 30% of the options are kept until expiration, and of those that are held until expiration, 76.5% expire worthless, then the assertion that "90% of options expire worthless" is not only false, but a bold lie. which was perpetuated over and over again until it became a marketing fact. The idea of 'options kept until expiration' and 'options expiring' was merged into one monolithic idea that simply compares apples to oranges.
The fact that only 30% of options expire does not mean that the remaining 70% of options succeed. We know that 10% of all options are converted to the underlying asset; this is a sign that 10 percent of all options are guaranteed to be successful. We also know that around 60% of options clear before they even expire. Some of them are profitable and some are not, but none of them ever hit expiration. So where does the 90% figure come from?
This is probably due to the fact that only 10% of the options are converted into their underlying asset. This means that 90% of the options are not converted into a futures contract or the underlying stock. So, without a doubt, the assumption is that if 90% of the options are not converted, they should expire worthless. This is a false assumption that is just not supported by the numbers. Even in the small percentage of options that expire, 30 percent, some of them expire with a cash value (13.5 percent, according to the CME).
So even though we know that the percentage of options that expire worthless is not 90%, there is reason to believe that the majority of options lose money. With 50-60% of contracts cleared before expiration and the majority of options expiring and expiring worthless, the odds are in favor of 50-60% of options to lose trades. While 50-60% is below the advertised 90% figure, selling options remains a promising opportunity.