Options Payout Ratio

[randomep]

 

Hi all,

 

Just curious here if anyone knows of the average amount paid out through options excercise versus amount paid. So for a typical option purchased, for each dollar paid, what is the expected amount that is exercised. It is analogous to the payout ratio of insurance. And options is a form of insurance.

 

Any literature on this is appreciated....

 

thanks 

[wescobrk]

Also, which website can one obtain implied volatility for call and put options on different stocks?

I thought Morningstar had it but now I can't seem to find it.

[randomep]

Also, which website can one obtain implied volatility for call and put options on different stocks?

I thought Morningstar had it but now I can't seem to find it.

 

That can be calculated given the option price, stock price, risk free rate, some stock return rate, right?

 

I am not saying I know how, but it can be done? So wouldn't there be some free tool or something that can do that?

[ERICOPOLY]

You pay a lot (in absolute terms) for a very deep-in-the-money put, and nearly a guarantee that you will get to exercise it.

 

Yet you pay a little (in absolute terms) for very out-of-the-money put, and unlikely to exercise it.

 

Is that what you are asking about? 

[randomep]

You pay a lot (in absolute terms) for a very deep-in-the-money put, and nearly a guarantee that you will get to exercise it.

 

Yet you pay a little (in absolute terms) for very out-of-the-money put, and unlikely to exercise it.

 

Is that what you are asking about?

 

No. I want to know statistically, out of all the millions of contracts out there. On average how much is excersized versus how much is paid (for the option). So if I buy a SPY option at 6, it expires worthless, then I the buyer is out 6. Next year I buy the put option at 6 again and it falls from 200 to 188 so I am up $6 on my option. Minus the $6 I lost this year, I am breaking even. If you play this out for all the options, who is ahead, the seller or the buyer. I wonder if the CME or some other institution keeps tabs of these stats.

 

I am just getting a feel for in the long run who wins, the option buyer? or the seller? or is it even?

 

 

[TwoCitiesCapital]

They say that something like 90% of all options expire worthless - sellers can generally do alright and make a few percentage points a year doing this. Buyers almost all of the time BUT when they do win, they win big.

 

I don't know the exact statistics though. In general, calls are more expensive then puts too because of unlimited upside potential so it could matter and what you're buying and selling.

[randomep]

They say that something like 90% of all options expire worthless - sellers can generally do alright and make a few percentage points a year doing this. Buyers almost all of the time BUT when they do win, they win big.

 

I don't know the exact statistics though. In general, calls are more expensive then puts too because of unlimited upside potential so it could matter and what you're buying and selling.

 

Well, but sometimes puts are more expensive than calls!

 

SPY, current price 200, for expiration dec 2014, strike 200, puts are $6, calls are $4 !!

 

Am I correct in thinking that the consensus is that the SPY (s&p500 index) is expected to fall by year end? And? or? we can say that everyone is worried and wants to protect their downside so demand for puts is outstripping supply so the put option price is bid up and it is overvalued?

 

any input is appreciated.......

[pocoapoco]

The spy dec 2014 calls and puts do not reflect a bearishness on the spy.  The reason the puts trade over the calls (by more than parity to the stock) is likely due to dividends that will be paid between now and December.  There is a 3 way arbitrage that can be done if the relationship between the stock, call, and put on a given option series gets out of whack so sentiment doesn't factor in.

 

As far as your original question of are options on average overpriced, underpriced, or fair, I don't know (I doubt it) but I would say that due to natural retail order flow it's likely that out of the money puts are generally expensive (people buy them for insurance) and out of the money calls are cheap (people sell them against their stock to collect premium).  That skews the market.

[ERICOPOLY]

You pay a lot (in absolute terms) for a very deep-in-the-money put, and nearly a guarantee that you will get to exercise it.

 

Yet you pay a little (in absolute terms) for very out-of-the-money put, and unlikely to exercise it.

 

Is that what you are asking about?

 

No. I want to know statistically, out of all the millions of contracts out there. On average how much is excersized versus how much is paid (for the option). So if I buy a SPY option at 6, it expires worthless, then I the buyer is out 6. Next year I buy the put option at 6 again and it falls from 200 to 188 so I am up $6 on my option. Minus the $6 I lost this year, I am breaking even. If you play this out for all the options, who is ahead, the seller or the buyer. I wonder if the CME or some other institution keeps tabs of these stats.

 

I am just getting a feel for in the long run who wins, the option buyer? or the seller? or is it even?

 

My question was sort of meant to point out how useless this exercise is (no pun intended).

 

The more expensive ones (in absolute dollar terms) are deep-in-the-money... so nearly certain to be exercised.  Thus, it's not informative to discover that how much is paid for the option is strongly linked to it's probability of being exercised. 

 

You pay more for a $3 strike BAC call versus a $30 strike BAC call.  Gee... I wonder why.

 

And there is no "winner" or "loser" here IMO -- it's a service and both parties benefit.  Who is the "winner" in fire insurance... the policyholder is a loser if the house doesn't burn down?

 

[frommi]

I am just getting a feel for in the long run who wins, the option buyer? or the seller? or is it even?

 

From my limited knowledge the option market is a zero sum business. On average the seller has an advantage because the tails of the volatility distribution are rare. But when they happen the buyer gets everything back that the seller has won. (Think about Oct. 1987)

But there are times like the end of 2008 where implied volatility was so high that you couldn`t really lose that much by selling options because you where in the middle of such a rare event and it was literally priced into the options as a permanent state.

You can get an edge through the mean reversion of implied volatility and that means sometimes its the buyer that has an advantage and sometimes the seller.

[randomep]

The spy dec 2014 calls and puts do not reflect a bearishness on the spy.  The reason the puts trade over the calls (by more than parity to the stock) is likely due to dividends that will be paid between now and December.  There is a 3 way arbitrage that can be done if the relationship between the stock, call, and put on a given option series gets out of whack so sentiment doesn't factor in.

 

As far as your original question of are options on average overpriced, underpriced, or fair, I don't know (I doubt it) but I would say that due to natural retail order flow it's likely that out of the money puts are generally expensive (people buy them for insurance) and out of the money calls are cheap (people sell them against their stock to collect premium).  That skews the market.

 

Learner, thanks that very insightful. So Put prices do not reflect negative sentiment.... hmmmm....

 

 

[watsa_is_a_randian_hero]

I second what eric said...this is useless information.  A few more reasons in addition to what eric pointed out:

 

1.  It will depend on what option strikes are offered.  For any given underlying stock, there could be more selection available, and that selection could be skewed to more in-the-money or more out-of-the money strikes.  Obviously of there is a selection bias at purchase, it will effect the results at expiration.

2.  It would depend upon what option strikes are purchased.  On any given underlying stock and for any given expiry month, market participants may have purchased more in-the-money ore more out-of-the money strikes.  Obviously of there is a selection bias at purchase, it will effect the results at expiration.  (This is what eric pointed out)

3.  Options are created out of thin air, and can be settled out of thin air before expiration.  A long could have been open, could have an in-the-money contract, and can close prior to expiration.  You would never close a worthless contract (it would be a waste of a commission).  However, for all sorts of reasons, you may want to trade a in-the-money contract prior to expiration.  This reduces the open interest of in-the-money contracts, and would skew the data you are looking for. 

 

For these reasons, and others, the data you are looking for would have no value.

[Hielko]

There is however a set of data that does answer the question that TS is looking for: the difference between realized volatility and implied volatility.

[ItsAValueTrap]

1- If you believe that insider trading is real, then it would make sense that (in aggregate) the buyers of volatility have an edge.

 

2- I suspect that the market will balance itself out.  If selling volatility is unusually profitable for a long period of time, then eventually too many people will flood into that trade.  And then some freak event wipes out all the gains from that strategy.

 

Historically that is what usually happens anyways.  I have no idea what the real answer is.

[Hielko]

@ItsAValueTrap:

 

1. Historically sellers of volatility have had an 'edge', but I doubt that this says anything about insider trading. It's a risk can be priced if necessary. Option sellers always have to worry that the counter party has some insight that they don't have.

 

2. I don't think that needs to be the case, but calling it an edge might also be the wrong word. Selling volatility is profitable in the long run - and prices adjusted after '87 to account for freak events - but it is not a risk-less profit. So depending on your assumptions you could argue that volatility sellers only make a fair risk adjusted return which means that there is no real reason to flood into that trade.

 

[leeway]

I think there are both insurance effect and lottery effect that explains why vol sellers have an edge over the long run. People go long options / vol to hedge, even they know net net they would lose on the hedges. On the other hand, long out of money calls/puts would give a lottery effect, not losing much if losing, but may win a lot when winning. There is some value in the positive "skew" and people pay for it.