Do Option Sellers Have a Trading Edge

According to a breakdown by the Chicago Mercantile Exchange Clearing House, more than 85% of all S&P options sold during the last three years expired out of the money and worthless.*
*Source: Chicago Mercantile Exchange Clearing House; Analysis of S&P options sold during the period 2004 through 2007.
asr: note this is recent report that is 2004 to 2007


How does the Time Means Money program use Probability Theory?
A: The Time Means Money program utilizes the fact that options sold near 2 standard deviations from the mean of the market will most likely expire worthless, allowing premium collectors to make money.
:: What is Probability Theory? ::
Probability theory is the branch of mathematics concerned with the analysis of random phenomena. The roll of a die, for example, is a random event. If repeated many times, the sequence of random events will exhibit certain statistical patterns, which can be studied and predicted...


The Time Means Money program first identifies trades that have a potentially high statistical probability of success. We then design suitable credit spreads that will limit risk while allowing for potentially maximum profits to be taken. Throughout the life of the trades, entry and exit points are determined, monitored, and with your approval, executed for you. While we do the work, all trade recommendations generated by this program are ultimately yours to take or ignore.


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ASR: the chosen period 1997-1999 is bull market , so even 75% CALL options expired ( PUTS 82% ) options sellers have edge as they are professionals.


Based on data obtained from the CME, I analyzed five major CME option markets - the S&P 500, eurodollars, Japanese yen, live cattle and Nasdaq 100 - and discovered that three out of every four options expired worthless. In fact, of put options alone, 82.6% expired worthless for these five markets.

This study analyzes data compiled by the Chicago Mercantile Exchange (CME) for a special options report prepared for this my book, Options on Futures: New Trading Strategies (Wiley & Sons), co-authored by Jonathan Lubow, vice-president of Trader's Edge, Inc., a futures and options brokerage based in Madison, NJ.

Three key patterns emerge from this study: (1) on average, three out of every four options held to expiration end up worthless; (2) the share of puts and calls that expired worthless is influenced by the primary trend of the underlying; and (3) option sellers still come out ahead even when the seller is going against the trend.

CME Data
Based on a CME study of expiring and exercised options covering a period of three years (1997, 1998 and 1999), an average of 76.5% of all options held to expiration at the Chicago Mercantile Exchange expired worthless (out of the money). This average remained consistent for the three-year period: 76.3%, 75.8% and 77.5% respectively, as shown in figure 1. From this general level, therefore, we can conclude that for every option exercised in the money at expiration, there were three options contracts that expired out of the money and thus worthless, meaning option sellers had better odds than option buyers for positions held until expiration.


This bias in favor of put sellers can be attributed to the strong bullish bias of the stock indexes during this period, despite some sharp but short-lived market declines. Data for 2001-2003, however, may show a shift toward more calls expiring worthless, reflecting the change to a primary bear market trend since early 2000