Mr. Marilyn Monroe Explains Value

Arthur Miller was a playwright in the middle of the 20th century.  On May 2, 1949 he was awarded the Pulitzer Prize for the play “Death of a Salesman”.  He also has some notoriety as being Marilyn Monroe’s third and final husband.  Miller once commented, “Don’t be seduced into thinking that which does not make a profit is without value.”  I’m honestly not sure what he was talking about here, but if Arthur dabbled in the option market between putting out Pulitzer Prize winning works he may have been referring to one of the biggest misperceptions about option trading.  That misperception – that over 90% of equity options expire without value (or out of the money in trader’s speak).

When a buyer and seller of an option contract come together and agree on a price they execute a trade.  If both are opening a new position then a new option contract has been created.  According to the Options Clearing Corporation in 2012 7.2% of option contracts created in this manner were exercised.  So market pundits see that statistic and assume that 92.8% of option contracts expire with no value.  Well, beyond exercising an option, there are actually two other things that can happen to an option contract.  The majority of options are actually closed out before expiration.  In fact in 2012 71.5% of option positions that were opened were exited before expiration.  That leaves 21.3% of options that actually do expire with no value.  The pie chart below breaks these statistics out.

OIC Stats

Source: Options Clearing Corporation            

So, when you are watching your favorite business channel and some market expert throws out that 90% of options expire with no value smile smugly knowing that is not the truth.  If someone drops that statistic in conversation, be an advocate for the option industry and speak up.  Another tidbit of wisdom from Marilyn Monroe’s ex-husband was, “The two most common elements in the world are hydrogen and stupidity.”  People that say 90% of options expire worthless have an abundance of one of those elements.

 

 

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…