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