Why 80% of Options Expire Worthless.
An adage in the commodity trading industry is that 80% of all options purchased expire worthless. Unfortunately, this generally is the case because 80% of those trading options have no gameplan or objective on their trade. Options trading appeals to the investor attracted to the leverage and the limited risk aspect of options trading. The problem is that options, by virtue of the fact that they are depreciating, time sensitive assets, actually require as much, if not more discipline, than do futures contracts. Traders drawn to options investing are attracted by the limited risk, and in so doing, drop their guard and tend not to keep as close a watch on their investment. The majority of option traders do indeed end up losing; the time clock and the calendar becoming their worst enemies. There needs to be an objective and a gameplan. If the entire strategy is to simply watch the option; most likely you will observe your options position appreciate in value, depreciate in value, and then in the vast majority of circumstances, expire worthless. This is what I call trading options passively. Below are a couple of ways to proactively trade the options markets, allowing the options trader to swing for the fence and to have a fallback strategy as well.
Simple Rules for the Trading of Options Proactively!
Most traders that seldom experience success with their option trading, make the mistake of purchasing only one option, which offers no flexibility with the trade. When the market moves your way and your option becomes profitable, you have nothing to take advantage of since you will be disinclined to cash out, take a profit and leave the market altogether; it basically becomes an all or nothing situation. If you believe enough in the trade to purchase the initial option, double up on your original purchase and buy twice as many. That way, you can immediately place an order with your broker to close out half of your positions if the options double in value, paying for the reminder of your options. This way you can indeed swing for the fence with the reminder of your options, without allowing your entire position expiring worthless. If the market makes a more modest move over a period of time, and the options do not double in value, have your broker adjust the target price on half of your options down to one and a half of what you paid for them, cutting the cost of the remaining options in half.
If the underlying market fails to move in your favor, or moves in the opposite direction, close out your options using the proceeds to purchase half as many positions, closer to the money. Basically this is time to bite the bullet and forsake leakage (the number of options) for position (getting closer to the money). You need to initiate this strategy once the market is either testing major support or becomes oversold (for call options), or is testing major resistance and becomes overbought (for put options). This fallback strategy requires a relatively smaller move in the underlining market to be profitable, or at least to get your money back. You can then either reposition and buy options in the same market with more time, or reassess the trade alike.
Hopefully the above information will allow you to turn the corner in your options trading by trading proactively and being actively engaged with your account, instead of passively watching your option account dwindle down to nothing. Determine once and for all to get out of the consistently losing 80% category and onto the 20% winning side. At least now you will have the mindset of trading options proactively. Good luck with your trading!