Buying Options Vs. Selling Options - Which Is Better? - YouTube

Buying Options Vs. Selling Options – Which Is Better?

One of the

first things many new options traders are taught is that more than 60% of all options

expire worthless.

This statistic, which never had hard research behind it, is usually meant to instill a sense

of caution in new and versed traders.

Understanding this statistic can help you understand the importance of trade timing

on entries and exits.

The strategies of new traders tend to focus on long positions and buying options.

They often fail to capture the profitable opportunities available using other strategies

that involve being an option seller, or short an option, to collect premium.

Being an option seller is somewhat different than shorting a stock.

When shorting a stock, you expect shares to move lower and only profit if that happens.

When selling an option.

there are a number of ways to make a profit.

You could sell a call against stock to collect premium, sell a put to collect premium with

the intent to own shares of the underlying at a discount if prices do drop lower, or

just sell a credit spread looking for prices to hold a level because you are not sure of

direction.

I came across a report created by Dr. John Summa which sheds some light on the subject

of who actually wins more often in options.

Is it the buyer or the seller of options?

Despite the report and research being dated thirteen years, I still find the information

very relevant and informative to option traders today.

In his study, Dr. Summa finds that time and time again, regardless of market direction,

the sellers of options have the advantage over the buyers.

Think of it like this; if more than 60% of options expire worthless, and less than 40%

of options expire with some value, then don’t you think you would rather be on the sell

side of the equation?

It is important to note that in his study, Dr. Summa is referring to the ratio of options

held to expiration that expire worthless.

He does not include all the options contracts that are closed for a lower price than they

were opened.

The 60% figure is the number I first learned when I began trading.

Over the years, I have seen statistics and articles citing that the percentage of options

that expire worthless can run up to an astronomical 90%, which is hard to believe.

It is hard to know exactly how many options contracts make money for the seller because

so many are closed for a profit before the expiration date.

Many traders, new and experienced alike, never consider the fact that time decay can work

to their advantage.

Whether they are bullish or bearish makes no difference.

These traders choose to trade long, on the buy side, and must work hard to overcome many

hurdles including time decay and priced-in moves.

In order to profit, these traders must utilize strict money management systems and a disciplined

approach to trading.

Options writers, another name for options sellers, must also use money management and

position sizing to protect themselves and their accounts.

Sellers, on the other hand, do not have to overcome time, the price movement of the underlying,

or volatility.

Option sellers can use those hurdles to their advantage and ride them to profits on a weekly

or monthly basis.

Dr. Summa’s study shows that over time, three of every four options that were traded

on the Chicago Mercantile Exchange and held to expiration expired worthless.

This means that sellers come out ahead of buyers 75% of the time.

An in-depth look at different portions of the study set showed that, depending on market

trend, 90% or more of calls or puts expired worthless in a given year.

Look at the put statistics for the S&P and the Nasdaq.

During the study period, the markets were rallying and over 90% of all puts held until

expiration expired worthless.

What this means is that during a bull market selling puts can be as close to a sure thing

in trading as it gets.

The reverse is true in a bear market.

The study is based on data collected from the CME over the course of three years from

1997-1999 and spans five distinct bull or bear markets.

In the study, the relationship of buyers versus sellers is based on options held all the way

until expiration.

It clearly shows that in the end, sellers always have the advantage over buyers.

The data is based on the relationship of expired worthless options to the number of exercised

options, regardless of profit.

Over the course of the three year period, the average number of options contracts held

to expiration that expired worthless was 76.5% of the total options volume for the five CME

markets studied.

The low was 75.8% and the high was 77.5%, creating a very narrow range and suggesting

that the number is fairly consistent over time regardless of market trend.

When broken down into the component markets, the underlying trend of sellers outpacing

buyers is seen again.

In that time, the percent of expired worthless options for S&P futures was over 80%, a staggering

figure.

In each of the markets studied, the number of options that expired worthless is much

higher than the number that expire in-the-money.

The underlying S&P market trend was bullish at the time, giving call buyers an added advantage

over the sellers, although still not enough to overcome the sell-side bias.

During that time, 59% of S&P calls expired worthless while only 41% expired in-the-money.

Further, we can see that in each market the underlying trend affected which type of option

was more likely to expire worthless.

When there was a bull market, put sellers won out and when there was bear market, call

sellers were the big winners.

The point is that regardless of market direction, sellers of calls and puts had the advantage

over the buyers.

Dr. Summa’s findings show that sellers of options have a distinct advantage over buyers.

The sell-side bias is so strong that, depending on market direction, options have up to a

98% chance of expiring worthless.

Even when sold in line with the underlying trend, the seller still has as much as a 75%

advantage over the buyer.

Taken in this light, it is easy to see how this statistic can be seen as an incentive

to all traders to at least think about trying to implement option selling strategies to

their arsenal.

This is why I feel that any trader looking to take their option trading to the next level

should develop a trading strategy that utilizes a strong foundation in option strategies using

credit positions like covered calls and credit spreads.

These trades are can be extremely profitable, especially when utilized as part of an ongoing

cash flow strategy in a portfolio.

If you are interested in reading the full report download here: Options Report

I have been very successful selling options

with a 92% success rate and took a $10,000 account to $26,875 in just a year’s time

with only one trade a week in the S&P 500 Index (SPX).

I created a course teaching exactly how you can use the same type of strategy to trade,

which takes less than 15 minutes a week.

If you are interested in learning this material check out my SPX Options Trading Course

Also, let me know your thoughts on the subject and have you had success with selling options�