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This pervasive statement that gets thrown around about "90% of options expiring worthless" is so wrong, on so many different levels. We can go down a long list of all of the reasons why it is totally meaningless. But, it is a LONG list. For example...just from an "option buyer" point of view, the question really should be "where did the option travel to throughout it's lifetime.?" It may have traded $2, then .10 , then $8, then .50, then $17 and expire worthless. Who knows how many options buyers could have bought it for $2, and sold it for $8 during it's lifetime, with the knowledge that it is a wasting asset, and one should be out of it before the heaviest time erosion starts to hit. That is just one, of dozens, of reasons that could be given. Then there is the whole other dimension of more "sophisticated" traders, who buy one option, and sell another against , as a spread, etc. The list goes on, and on... They are SO irresponsible in all of their presentations, because they are approaching it from a "marketing" perspective, rather than an educational one. And, worst of all, they are appealing to a group of people, who are mostly novices, and appealing to that desire of wanting to make easy money. It "sounds" so good to these people but, out of everything they present, it is just "theoretical" ideas, attempting to be backed up by "curve fitted" back tests. They never actually go through a systematic, step by step, explanation, of a "coherent" strategy. Just nice sounding ideas, which do not work, in the long run, and probably even in the short run.

Something everyone should frame and put above their PC when trading - thing is that looking for patterns is a fundamental part of human nature. It is probably the prime evolutionary edge that put humans where they are on this planet. Hence we all have a tendency to look for patterns and we are very good at it - in fact we can see patterns in pure chaos (e.g. the Rorschach blot test or indeed the stockmarket). The attraction of a simple pattern based rule like "Sell premium" is that its easy to understand and satisfies a very deep seated psychological need in us. Accepting that for 99%+ the stockmarket is a walk in the park is counter-intuitive to almost everybody, show a technical analyst a chart generated by a random number function and they will show you resistance patterns and supports - its even harder for people to let go of a pattern that was once successful but due to change of circumstances or arbitrage stops being successful. I only came across Sosnoff earlier this year - at first I was intrigued and amused - some of his stuff is quite entertaining. However when you look at their 'remedies for trades gone bad' is when you realise they are a lethal danger. Inevitably they recommend sticking to the bad trade and for Iron Condors for example reducing them eventually to an Iron Fly practically locking in losses at every step and making the chances of breaking even let alone profit smaller and smaller. In an exchange with them over that they stubbornly stuck to the POV that whilst my remark was valid sticking with the strategy for better or worse was the way to do things. Thats where I checked out.

@poseidolginko already done with the newest update. Have fun!

The idea of selling options based on the premises that "90% of options expire worthless, so lets sell them. Lets be the house" sounds compelling to new traders - until they have few big losses and start to realize that things are more complicated. After being burned countless times, tastytrade continue recommending selling options before earnings on high flying stocks. Just ask those who did it before last FB earnings - Lessons From Facebook Earnings Disaster. Try to repair this one after it lost 10 times all previous wins worth. So many people follow Tom Sosnoff because of his charisma - they simply don't realize how risky and dangerous his methods are.

FB is one of the mostly watched stock in the US stock market. Many options traders try to play earnings using FB options. There are few alternatives. We will backtest them using CMLviz Trade Machine. 1. Buying Call Options This strategy involved buying call options on the day of the earnings announcement and selling them the next day. Here are the results: Tap Here to See the back-test This doesn't look so good. How about a bearish trade? 2. Buying Put Options This strategy involved buying put options on the day of the earnings announcement and selling them the next day. Here are the results: Tap Here to See the back-test Looks much better. However, this result was heavily impacted by the last earnings release. You remove the gains from the last cycle, the strategy would be a loser as well. Tap Here to See the back-test How about buying a straddle (both calls and puts)? 3. Buying a straddle This strategy involved buying a straddle on the day of the earnings announcement and selling them the next day. Here are the results: Tap Here to See the back-test Once again, big chunk of the gains came from the last cycle when the stock tanked ~20%. Removing the last cycle causes the overall return to become negative: Tap Here to See the back-test How about selling the straddle? 4. Selling a straddle This strategy involved selling a straddle on the day of the earnings announcement and selling them the next day. Here are the results: Tap Here to See the back-test Overall loss - but again, ALL of the total loss came from the last cycle. If we remove the last cycle, the overall result becomes positive: Tap Here to See the back-test We performed the back testing using the CMLviz Trade Machine which an option back-tester created by Capital Market Laboratories (CML). It is a very powerful tool that allows you to back test almost any possible setup. Tap Here to See the Tools at Work Those backtests confirm what we already knew (more or less): Buying straddles before earnings is on average a losing proposition. You will lose most of the time, but you might win big couple times when the stock makes a huge move. Chart from optionslam.com. Based on those statistics, many options "gurus" suggest selling options on high flying stocks like FB,AMZN, NFLX etc. They claim this is a "high probability strategy". What they "forget" to mention (or maybe simply don't understand) is that high probability doesn't necessarily mean low risk. Here is an excellent example used by our guest contributor Reel Ken: We load a six-shooter gun with one deadly round and play Russian Roulette for $100 per trigger squeeze. The odds are 83% (5/6) that you win. Does that make it low-risk? What would low-risk look like? How about a 13-round Glock where your probability of success is over 90%. For certainly, if one defined risk as favorable odds, we would expect many takers, but I'll bet there wouldn't be any. The reason is simple: One doesn't define risk by the probability of success. I often see this mistake when pundits promote investing strategies such as selling deep-out-of-the-money-puts (DOTM) on volatile stocks and lauding the low-risk-nature of the trade. "The stock would have to drop over x% (6%,7%, 10%) for you to lose". Well, Facebook reminded us of the real risk in such strategies. Yes, risk isn't the chance of loss, it is the magnitude of potential loss. Too many simply confuse probability with risk. This confusion is because investors don't understand there is a completely other operative metric. They can easily put their hands around the potential loss and even recognize when a probability is very high or very low (I hope). But probability isn't risk. And, though maximum loss is risk, maximum loss is very, very rare. The maximum loss on the S&P is it going to ZERO, and though that's possible, it isn't helpful for us to evaluate investing loss. Lets check how this strategy would work for FB in the last cycle, by selling 1 SD strangle on the day of earnings. With the stock trading around $217, you would be selling 232.5 calls and $202.5 puts, for $208 credit. This is how P/L chart would look like: The trade would tolerate around 7% move in each direction, which would work well most of the cycles. Based on the options deltas, the trade had ~70% probability of success. Not bad. As a side note, the trade would require around $2,850 margin, so even if you kept the whole credit, your return on margin would be around 7%. Fast forward to the next day after earnings have been announced and the stock was down almost 20%: The trade was down a whopping $2,407, which would erase 12 months of gains (even if ALL previous trades were winners). Conclusions Earnings are completely unpredictable. In order to make money from earnings trades held through the announcement, too many things have to go right and too many things can go wrong. Selling options around earnings have an edge on average for most stocks, but they have a much higher risk than buying options, especially if the options are uncovered. Don't confuse high probability with low risk. You can win 70-80% of the time, but you can also lose few times in a row. And when you lose, you can lose big time. Those "one in a lifetime events" happen more often than you believe. Even if you did your homework and backtesting and decided to hold your trade through earnings, always assume a 100% loss and size your position accordingly. Even if the backtesting shows 90% winning ratio for a certain strategy, one huge move (in any direction) can erase months and months of gains. The bottom line: trading options around earnings can be a very profitable strategy - but closing the positions before earnings will produce much more predictable and stable results with much less volatility. "Trying to predict the future is like driving down a country road at night with no headlights on and looking out the back window." - Peter Drucker Related articles: Why We Sell Our Straddles Before Earnings Why We Sell Our Calendars Before Earnings How NOT To Trade NFLX Earnings Betting On AAPL Earnings?