What is the probabability of being sucessful when going long a finacial stock option?

Question

Taking into consideration, underlying stock's price movement, time deteioration, the bid ask spread, etc.

Answer 1

The two answers you have already received both made good points. I'll try to add a couple more.

The probability, of course, depends in part on your skill at picking which option to buy. You correctly identified price movement (delta and gamma risk) as a major factor, but that is pretty much a 50:50 factor. Time deterioration (theta risk) always works against you when you take a long position. Two other factors that always work against you are carrying cost (interest not earned on the money tied up in the option) and transaction cost (commissions). Usually the bid-ask spread will work against you but if you have the ability to monitor the market while trading, and you pick an option with enough liquidity, you can actually make it work in your favor since your limit order will be exercised before a market makers quote at the same price. Since interest rate volatility (rho risk) is usually not significant, that only leaves one risk factor, the changes in implied volatility (vega risk). If you can determine when to trade to benefit from vega you can use it to your advantage.

As was already mentioned, you did not define what you meant by successful. For option trading, I would have to define it as making more than the risk-free interest rate after carrying and transaction costs. If you only define it as making a profit, I can always find arbitrage options spreads (box spreads or conversions) that will make a profit but less than the risk-free interest rate.

When you go long an unhedged option you should expect that it will lose money, even if you are good. However, if you are good enough you will pick some options that have such large gains they swamp your losing positions. Since you asked about "going long a financial stock option" that fact, no matter how relevant, does not matter.

My best guess, and it is only guess, is that the answer to your question is around 30%. Of course, you can reduce that percentage by buying a far out of the money option or you can increase it by buying an option so deep in the money that there is almost no "time premium" and not holding it long enough to have high carrying costs.

All of this begs the question "Why would you choose to simply buy an option instead of opening a spread which has a better chance of success?"

Given your "oex" id I have assumed you know enough about options to have followed what I said. If I am wrong, and my discussion was way over your head, I apologize.

Addendum

I believe Mathew C,s answer is off base since

(1) you may sell an option for a profit before expiration, in which case it does not matter if the option is in or out of the monay at expiration, and

(2) even if you hold the option until expiration, and the option is in the money at expiration, you will not make money if the option is not far enough in the money.

Answer 2

On average, a little less than 50% if you define successful as "making money." Think about it. You can buy a call or a put. Calls go up when the stock does whereas puts go up when the stock goes down. So, assuming you buy a call or put "at-the-money" the stock can go either up or down (or stay the same).

If you think the stock will go up, buy a call.
If you think the stock will go down, buy a put.
If you think the stock will move a lot - but not sure which direction, buy both.
If you think the stock won't move a lot and it'll stay flat, sell ("write") both a put and a call.

The odds of being successful trading stock options long-term is 10%. I've heard this magic 10% number in multiple books I've read on the subject.

Answer 3

All of the answers given above are correct to some extent, but what one should figure out is the probability of and option ending 'in the money'.
Assume the option we are dealing with is highly liquid. The Implied volatility is less than statistical volatility and the delta curve which is a cubic spline is in the out of the money state. Then probability of it moving into the 'in the money state' can be close to,
1 - (strike price e^(strike price x time to expiry)) divided by (strike price e^strike price x time for type of option). Time for type of option is if it is a one month expiry option time for type of option should be 30 days.
This should give the probability of it just moving into the in the money state. This probably is the best you can get after that being succefull in the particular trade depends on how far it will rise from there.

Answer 4

I have to disagree with the 50% answer. The problem is that stock options sell at premiums and have expiration dates. Those two factors are working against you. My educated guess is about 15%--somewhere in that neighborhood.