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The best benchmarks of what works and doesn't work are generally based
on fiction or often someone trying to sell something. The only data
collectors of open/close data are the exchangess and the OCC and I've
seen every study they have ever done and nothing confirms what you
"hear" out there.
Additionally even pure RAW numbers tell you nothing about profitability
because you could be looking at a multipart trade..say a time spread
where someone WANTED something to expire.
Additionally NO open/close data is captured from market
maker/specialists so even in it's current form the data is tough to
translate into profitability.
If you looked at a period like the last 3 years a smaller percentage of
the OTM options went off worthless than in other periods..so any kind of
longterm generalization would be skewed.
AS A GENERAL RULE OPTION BUYERS MAKE MONEY WHEN ACTUAL VOLATILITY
EXCEEDS IMPLIED(THIS HAS BEEN THE CASE FOR MUCH OF THE LAST FEW YEARS
AND HAS BEEN COMMON FOR MUCH OF THE 90'S). SELLERS DO BETTER THAN
BUYERS WHEN IMPLIED IS BIGGER THAN ACTUAL.
If you want a quick dirty guess of what an option expected outcome
is..take an option pricing model..price the option you are looking at
and calculate the option price for that interest rate and volatility.
THIS ISS REALLY ONLY GOOD FOR SHORT TERM OPTIONS>>>>>>SAY 4 MONTHS OR
LESS. Then set the carry to 0% and calculate the delta....That number
is the market place's current best GUESS of the option being ITM on
expiration Friday..it's not the probability of making a profit because
at the expiration the option would have to recover the premium paid to
break even.
Say the stock is 50 and you buy a 5 call with a delta of 10 when the
carry is zero. That option would have an expected probability of
expiring OTM 90% of the time.
LET ME EMPHASIZE THIS IS THE MARKETPLACE'S CURRENT BEST ESTIMATE and you
have to consider it as really ROUGH estime because it assumes a very
normal distribution..no skew..no fat tails. So consider it a best
guess.
Will that option expire worthlesss 90% of the time...most likely. Will
that option payoff big less than 90% of the time...most likely.
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