We are primarily premium sellers and we do so because our studies have shown that Implied Volatility (IV) overstates the expected move of options. This allows us to take advantage of Theta (time decay). Since most of our work on this was centered on delta neutral strategies such as short Strangles and short Straddle we thought it would be a good idea to study Puts and Calls individually. So what is the actual probability that a Put or a Call will expire out-of-the-money (OTM) and end up worthless?
Our study was conducted in the SPX (S&P 500 Index) on every option expiring in 2015 (388,600 occurrences). We calculated the the probability of the out-of-the-money (OTM) options and analyzed the real percentage of ITM/OTM at expiration and compared the theoretical values to the observed values.
A table of the results comparing the probability of SPX options expiring OTM to the number of options that actually expired OTM. The table showed that the Calls expired OTM less than the overall expected number. The OTM Puts expired OTM more than the expected number. A graphical representation showed how far OTM Puts expired far more frequently than expected and this was attributed to Volatility Skew. Tom asked the age old question, “Are Puts shmutz? Tom and Tony’s answer is, if you’re willing to take the additional risk of velocity, you get paid for it.”
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the important takeaways and the detailed results of our study on how often OTM options actually expire worthless as compared to their expected probabilities.
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