Introduction to options: part seven: Selling Options versus Buying ...

The majority of options expire worthless

When you first examine options as an investment you discover things which are disconcerting or uncomfortable facts, which may convince you options are bad investments.

Uncomfortable fact number one: the majority of options expire worthless and are not exercised. The means there was no return on the investment in the simplest sense.
This is discouraging, and begs the question; Why are people investing in options if the majority expire worthless?
To answer this question I ask you to think differently, I will ask you to think about a an options purchase as a transaction between a buyer and a seller. I will also ask you to look at the common strategy of buy low, sell high more critically.

The simplest strategy of business is buy low, sell high.

All business seem to rely on this, from food, energy, services and even cryptocurrency.
People buy goods at one price and try to sell them at a higher price to make a profit.

The majority of new businesses fail

Uncomfortable fact number two: the majority of new businesses fail.
I ask you to remember that the majority of businesses rely on the strategy of buy low and sell high.
If the majority of businesses rely on buy low and sell high, and the majority of new businesses fail, then does this not suggest that buy low and sell high is a failing strategy?

The majority of options expire worthless

If we look at options traders as whole, and see that the majority are employing the strategy of buy low and sell high, and we understand the majority of options expire worthless, does this suggest this strategy is statistically a losing strategy across many markets and businesses!

One Definition of Insanity

We we are faced with the age old adage, that if you continue to do what you always have done, you will continue to get, what you always have gotten.
So if you continue to use the strategy of buy low and sell high, and continue to lose, are you insane?
Hmmmm let us move forward.
So options traders are no different from stock traders or many small business men across many markets, employing the same buy low, sell high strategy, which fails the majority of the time.
So I ask you what could you do differently to have a different outcome? Sell high, and buy low.

Follow the Money

I ask you to think differently, because this is the key to success.
Every stock or options transaction has a buyer and seller.
The buyers hope to buy low and sell high.
The sellers hope to sell high and buy low.
The majority of options purchased expire worthless, so where does the money, spent by the buyers go? It goes to the sellers.
Hmmm.
Every transaction has a buyer and a seller.
If you buy an option hoping the market price goes up, so you can sell it at a higher price, but the price goes down and you lose your money, who did you lose it to? The seller.

This is not what everyone else is doing!

Many traders will read this post, and although it makes sense, they will refuse to change their behavior, because they think most traders are buyers, not sellers. And humans are uncomfortable acting differently from the crowd.
It is true that sticking with the crowd provides protection against predators and when the crowd of birds flies south for the winter, the birds that fly south survive.
But in life we see the majority of people are struggling financially, but they continue to do exactly what everyone else is doing financially, and they continue to get the same result; financial struggles.
But some are doing something different, and they are getting a different result.
If you are curious about getting a different result, read the next installment in this series, introduction to options.
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