Is it true that 90% of options expire worthless? If so, according to a popular argument, it proves that option sellers have the advantage over option buyers.
What a wonderful example of false logic. It leaves out the essential question, namely – how much do option sellers win on winning trades vs how much they lose on losing trades?
In other words, if you win a dollar 90% of the time – but lose $50 10% of the time, then you’re still a net loser.
The basic truth of being an option seller is well-known to every professional option trader. You will make money most of the time but get killed occasionally. And a one-time loss from a catastrophe can easily dwarf profits made over 10 years of steady markets.
I’ve seen it argued that you can make money selling options while hedging your risk. That’s like saying I can be paid for assuming risk yet actually take no risk. Doesn’t work. The myth of risk-free profits underlies such legendary blowouts as Long Term Capital, Bear Stearns, Lehman – the list goes on and on.
The truth is that no successful trader is either a 100% buyer of options or a 100% seller. The trick is to understand the market and do the right thing given current conditions. Sometimes that means being a buyer of options, sometimes a seller, sometimes a spreader. There’s no simple formula for success.