How can it be possible that only ~10% of options expire worthless, and only ~10% are exercised?
"Consider the futures market. Traders buy and sell gold futures, but very few contracts, relatively speaking, result in delivery. The contracts are sold, and ""Open interest"" dwindles to near zero most months as the final date approaches. The seller buys back his short position, the buyer sells off his longs.  When I own a call, and am 'winning,' say the option that cost me $1 is now worth $2, I'd rather sell that option for even $1.95 than to buy 100 shares of a $148 stock. The punchline is that very few option buyers actually hope to own the stock in the end. Just like the futures, open interest falls as expiration approaches." "You gave your own answer - the 80% is positions, not contracts. Most actors on the option market have no interest in the underlying asset. They want ""just"" exposure to its price movement. It makes more sense to close your position than to be handed over bushels of wheat or whatever."
Really all you need to know is that American style can be exercised at any point, European options cannot be exercised early. Read on if you want more detail.  The American style Call is worth more because it can be exercised at any point. And when the company pays a dividend, and your option is in the money, if the extrinsic value is worth less than the dividend you can be exercised early. This is not the case for a European call. You cannot be exercised until expiration. I trade a lot of options, you wont be exercised early unless the dividend scenario I mentioned happens. Or unless the extrinsic value is nothing, but even then, unless the investor really wants that position, he is more likely to just sell the call for an equivalent gain on 100 shares of stock. As other uses have pointed out, your example is unusual in that is does not include any time value or volatility value in the quoted premiums, the premiums you quote are only intrinsic values.  For well in-the-money options, the intrinsic value will certainly be the vast majority of the premium, but not the sole component. Having said that, the answer would clearly be that the buyer should buy the $40 call at a premium of $10.  The reason is that the buyer will pay less for the option and therefore risk less money, or buy more options for the same amount of money.  Since the buyer is assuming that the price will rise, the return that will be realised will be the same in gross terms, but higher in relative terms for the buyer of the $40 call.   For example, if the underlying price goes to $60, then the buyer of the $40 call would (potentially) double their money when the premium goes from $10 to $20, while the buyer of the $30 call would realise a (potential) 50% profit when the premium goes from $20 to $30. Considering the situation beyond your scenario, things are more difficult if the bet goes wrong.  If the underlying prices expires at under $40, then the buyer of the $40 call will be better off in gross terms but may be worse off in relative terms (if it expires above $30).  If the underlying price expires between $40 and $50, then the buy of the $30 will be better off in relative term, having lost a smaller percentage of their money. "An option is an instrument that gives you the ""right"" (but not the obligation) to do something (if you are long). An American option gives you more ""rights"" (to exercise on more days) than a European option. The more ""rights,"" the greater the (theoretical) value of the option, all other things being equal, of course. That's just how options work.  You could point to an ex post result, and and say that's not the case. But it is true ex ante." Think of it this way, if you traveled back through time one month - with perfect knowledge of AAPL's stock price over that period - which happens to peak viciously then return to its old price at the end of the period - wouldn't you pay more for an American option? Another way to think about options is as an insurance policy.  Wouldn't you pay more for a policy that covered fire and earthquake losses as opposed to just losses from earthquakes? Lastly - and perhaps most directly - one of the more common reasons people exercise (as opposed to sell) an American option before expiration is if an unexpected dividend (larger than remaining time value of the option) was just announced that's going to be paid before the option contract expires.  Because only actual stockholders get the dividends, not options holders.  A holder of an American option has the ability to exercise in time to grab that dividend - a European option holder doesn't have that ability. Less flexibility (what you're paying for really) = lower option premium. "I thought the other answers had some good aspect but also some things that might not be completely correct, so I'll take a shot. As noted by others, there are three different types of entities in your question:  The ETF SPY, the index SPX, and options contracts. First, let's deal with the options contracts.  You can buy options on the ETF SPY or marked to the index SPX.  Either way, options are about the price of the ETF / index at some future date, so the local min and max of the ""underlying"" symbol generally will not coincide with the min and max of the options.  Of course, the closer the expiration date on the option, the more closely the option price tracks its underlying directly.  Beyond the difference in how they are priced, the options market has different liquidity, and so it may not be able to track quick moves in the underlying. (Although there's a reasonably robust market for option on SPY and SPX specifically.) Second, let's ask what forces really make SPY and SPX move together as much as they do.  It's one thing to say ""SPY is tied to SPX,"" but how?  There are several answers to this, but I'll argue that the most important factor is that there's a notion of ""authorized participants"" who are players in the market who can ""create"" shares of SPY at will.  They do this by accumulating stock in the constituent companies and turning them into the market maker.  There's also the corresponding notion of ""redemption"" by which an authorized participant will turn in a share of SPY to get stock in the constituent companies. (See http://www.spdrsmobile.com/content/how-etfs-are-created-and-redeemed and http://www.etf.com/etf-education-center/7540-what-is-the-etf-creationredemption-mechanism.html) Meanwhile, SPX is just computed from the prices of the constituent companies, so it's got no market forces directly on it.  It just reflects what the prices of the companies in the index are doing. (Of course those companies are subject to market forces.) Key point: Creation / redemption is the real driver for keeping the price aligned.  If it gets too far out of line, then it creates an arbitrage opportunity for an authorized participant.  If the price of SPY gets ""too high"" compared to SPX (and therefore the constituent stocks), an authorized participant can simultaneously sell short SPY shares and buy the constituent companies' stocks.  They can then use the redemption process to close their position at no risk.  And vice versa if SPY gets ""too low."" Now that we understand why they move together, why don't they move together perfectly.  To some extent information about fees, slight differences in composition between SPY and SPX over time, etc. do play.  The bigger reasons are probably that (a) there are not a lot of authorized participants, (b) there are a relatively large number of companies represented in SPY, so there's some actual cost and risk involved in trying to quickly buy/sell the full set to capture the theoretical arbitrage that I described, and (c) redemption / creation units only come in pretty big blocks, which complicates the issues under point b. You asked about dividends, so let me comment briefly on that too.  The dividend on SPY is (more or less) passing on the dividends from the constituent companies. (I think - not completely sure - that the market maker deducts its fees from this cash, so it's not a direct pass through.)  But each company pays on its own schedule and SPY does not make a payment every time, so it's holding a corresponding amount of cash between its dividend payments.  This is factored into the price through the creation / redemption process.  I don't know how big of a factor it is though." Out of the money options often have the biggest changes in value, when the stock moves upward. This person could also gain, by the implied (underlying) volatility of the stock rising if it moves erratically to either side. Still seems to be a very risky game, given only 4 days to expiry. Equity options, at least those traded in the American exchanges, actually expire the Saturday after the 3rd Friday of the month.  However, the choice to trade or exercise the options must be specified by the 3rd Friday. This is outlined by the CBOE, who oversees the exchange of equity options.  Their FAQ regarding option expiration can be found at http://www.cboe.com/LearnCenter/Concepts/Beyond/expiration.aspx. Looking at the SPY option chain you posted, all of the call options with a strike price of 199.50 or higher have a bid of N/A.  That's because the ask price for all of those options is 0.01, and the bid price has to be less than the ask price, but buyers are not allowed to bid 0.00.  It's not accurate to say that no one wants to buy those calls - anyone who wanted to buy one of those calls would just buy it at the ask price of 0.01. So why are people selling those calls for just 0.01?  The further out of the money you go as you get closer to expiration, the less likely the underlying stock or ETF (SPY in this case) will go over the strike price, and the less you can sell it for.  SPY closed yesterday at about 195, and it would have to go up almost 2.5% today for the 199.50 calls to be in the money, and a 2.5% move in one day is extremely unlikely. I'm sorry, but your math is wrong.  You are not equally likely to make as much money by waiting for expiration. Share prices are moving constantly in both directions.  Very rarely does any stock go either straight up or straight down.  Consider a stock with a share price of $12 today.  Perhaps that stock is a bad buy, and in 1 month's time it will be down to $10.  But the market hasn't quite wised up to this yet, and over the next week it rallies up to $15. If you bought a European option (let's say an at-the-money call, expiring in 1 month, at $12 on our start date), then you lost.  Your option expired worthless. If you bought an American option, you could have exercised it when the share price was at $15 and made a nice profit. Keep in mind we are talking about exactly the same stock, with exactly the same history, over exactly the same time period.  The only difference is the option contract.  The American option could have made you money, if you exercised it at any time during the rally, but not the European option - you would have been forced to hold onto it for a month and finally let it expire worthless. (Of course that's not strictly true, since the European option itself can be sold while it is in the money - but eventually, somebody is going to end up holding the bag, nobody can exercise it until expiration.) The difference between an American and European option is the difference between getting N chances to get it right (N being the number of days 'til expiration) and getting just one chance.  It should be easy to see why you're more likely to profit with the former, even if you can't accurately predict price movement. First, in the money options are scarcely created because most options trade at the money with the rest evenly distributed between in and out, so they are at best half the market when created. They are also closed before expiration. The reason is still unknown, but one theory is: Barely in the money options carry enormous exercise risk because the chance that could be turned into a potentially solvency threatening unhedged liability is great; therefore, option sellers prefer to close barely in the money options so not to take on unhedged liability risk. Statistically, option sellers are risk avoiders. In the first case, if you wish to own the stock, you just exercise the option, and buy it for the strike price. Else, you can sell the option just before expiration, it will be priced very close to its in-the-money value. If you are in the money at expiration you are going to get assigned to the person on the other side of the contract. This is an extremely high probability. The only randomness comes from before expiration. Where you may be assigned because a holder exercised the option before expiration, this can unbalance some of your strategies. But in exchange, you get all the premium that was still left on the option when they exercised. An in the money option, at expiration, has no premium. The value of your in the money option is Current Stock price - Strike Price, for a call. And Strike price - Current Stock price, for a put. Thats why there is no free lunch in this scenario. "The answer to the question, can I exercise the option right away? depends on the exercise style of the particular option contract you are talking about. If it's an American-style exercise, you can exercise at any moment until the expiration date. If it's an European-style exercise, you can only exercise at the expiration date. According to the CME Group website on the FOPs on Gold futures, it's an American-style exercise (always make sure to double check this - especially in the Options on Futures world, there are quite a few that are European style): http://www.cmegroup.com/trading/metals/precious/gold_contractSpecs_options.html?optionProductId=192#optionProductId=192 So, if you wanted to, the answer is: yes, you can exercise those contracts before expiration. But a very important question you should ask is: should you? Option prices are composed of 2 parts: intrinsic value, and extrinsic value. Intrinsic value is defined as by how much the option is in the money. That is, for Calls, it's how much the strike is below the current underlying price; and for Puts, it's how much the strike is above the current underlying price. Extrinsic value is whatever amount you have to add to the intrinsic value, to get the actual price the option is trading at the market. Note that there's no negative intrinsic value. It's either a positive number, or 0. When the intrinsic value is 0, all the value of the option is extrinsic value. The reason why options have extrinsic value is because they give the buyer a right, and the seller, an obligation. Ie, the seller is assuming risk. Traders are only willing to assume obligations/risks, and give others a right, if they get paid for that. The amount they get paid for that is the extrinsic value. In the scenario you described, underlying price is 1347, call strike is 1350. Whatever amount you have paid for that option is extrinsic value (because the strike of the call is above the underlying price, so intrinsic = 0, intrinsic + extrinsic = value of the option, by definition). Now, in your scenario, gold prices went up to 1355. Now your call option is ""in the money"", that is, the strike of your call option is below the gold price. That necessarily means that your call option has intrinsic value. You can easily calculate how much: it has exactly $5 intrinsic value (1355 - 1350, undelrying price - strike). But that contract still has some ""risk"" associated to it for the seller: so it necessarily still have some extrinsic value as well. So, the option that you bought for, let's say, $2.30, could now be worth something like $6.90 ($5 + a hypothetical $1.90 in extrinsic value). In your question, you mentioned exercising the option and then making a profit there. Well, if you do that, you exercise your options, get some gold futures immediately paying $1350 for them (your strike), and then you can sell them in the market for $1355. So, you make $5 there (multiplied by the contract multiplier). BUT your profit is not $5. Here's why: remember that you had to buy that option? You paid some money for that. In this hypothetical example, you payed $2.30 to buy the option. So you actually made only $5 - $2.30 = $2.70 profit! On the other hand, you could just have sold the option: you'd then make money by selling something that you bought for $2.30 that's now worth $6.90. This will give you a higher profit! In this case, if those numbers were real, you'd make $6.90 - $2.30 = $4.60 profit, waaaay more than $2.70 profit! Here's the interesting part: did you notice exactly how much more profit you'd have by selling the option back to the market, instead of exercising it and selling the gold contracts? Exactly $1.90. Do you remember this number? That's the extrinsic value, and it's not a coincidence. By exercising an option, you immediately give up all the extrinsic value it has. You are going to convert all the extrinsic value into $0. So that's why it's not optimal to exercise the contract. Also, many brokers usually charge you much more commissions and fees to exercise an option than to buy/sell options, so there's that as well! Always remember: when you exercise an option contract, you immediately give up all the extrinsic value it has. So it's never optimal to do an early exercise of option contracts and individual, retail investors. (institutional investors doing HFT might be able to spot price discrepancies and make money doing arbitrage; but retail investors don't have the low commissions and the technology required to make money out of that!) Might also be interesting to think about the other side of this: have you noticed how, in the example above, the option started with $2.30 of extrinsic value, and then it had less, $1.90 only? That's really how options work: as the market changes, extrinsic value changes, and as time goes by, extrinsic value usually decreases. Other factors might increase it (like, more fear in the market usually bring the option prices up), but the passage of time alone will decrease it. So options that you buy will naturally decrease some value over time. The closer you are to expiration, the faster it's going to lose value, which kind of makes intuitive sense. For instance, compare an option with 90 days to expiration (DTE) to another with 10 DTE. One day later, the first option still has 89 DTE (almost the same as 90 DTE), but the other has 9 DTE - it relatively much closer to the expiration than the day before. So it will decay faster. Option buyers can protect their investment from time decay by buying longer dated options, which decay slower! edit: just thought about adding one final thought here. Probabilities. The strategy that you describe in your question is basically going long an OTM call. This is an extremely bullish position, with low probability of making money. Basically, for you to make money, you need two things: you need to be right on direction, and you need to be right on time. In this example, you need the underlying to go up - by a considerable amount! And you need this to happen quickly, before the passage of time will remove too much of the extrinsic value of your call (and, obviously, before the call expires). Benefit of the strategy is, in the highly unlikely event of an extreme, unanticipated move of the underlying to the upside, you can make a lot of money. So, it's a low probability, limited risk, unlimited profit, extremely bullish strategy." The options market requires much more attention to avoid the situation you're describing. An overnight $10 ask will remain on the books most likely as Good-Til-Canceled.  The first to bid the low order gets it.  If traders are paying attention, which they probably are then they will bid at $10.  If not, they will bid immediately at $20. If they crossed the order, it would be filled at their higher than $10 bid. This is all governed by the exchange where the ask is posted, and most implement price-time priority. "Seems like you are concerned with something called assignment risk. It's an inherent risk of selling options: you are giving somebody the right, but not the obligation, to sell to you 100 shares of GOOGL. Option buyers pay a premium to have that right - the extrinsic value. When they exercise the option, the option immediately disappears. Together with it, all the extrinsic value disappears. So, the lower the extrinsic value, the higher the assignment risk. Usually, option contracts that are very close to expiration (let's say, around 2 to 3 weeks to expiration or less) have significantly lower extrinsic value than longer option contracts. Also, generally speaking, the deeper ITM an option contract is, the lower extrinsic value it will have. So, to reduce assignment risk, I usually close out my option positions 1-2 weeks before expiration, especially the contracts that are deep in the money. edit: to make sure this is clear, based on a comment I've just seen on your question. To ""close out an options position"", you just have to create the ""opposite"" trade. So, if you sell a Put, you close that by buying back that exact same put. Just like stock: if you buy stock, you have a position; you close that position by selling the exact same stock, in the exact same amount. That's a very common thing to do with options. A post in Tradeking's forums, very old post, but with an interesting piece of data from the OCC, states that 35% of the options expire worthless, and 48% are bought or sold before expiration to close the position - only 17% of the contracts are actually exercised! (http://community.tradeking.com/members/optionsguy/blogs/11260-what-percentage-of-options-get-exercised) A few other things to keep in mind: certain stocks have ""mini options contracts"", that would correspond to a lot of 10 shares of stock. These contracts are usually not very liquid, though, so you might not get great prices when opening/closing positions you said in a comment, ""I cannot use this strategy to buy stocks like GOOGL""; if the reason is because 100*GOOGL is too much to fit in your buying power, that's a pretty big risk - the assignment could result in a margin call! if margin call is not really your concern, but your concern is more like the risk of holding 100 shares of GOOGL, you can help manage that by buying some lower strike Puts (that have smaller absolute delta than your Put), or selling some calls against your short put. Both strategies, while very different, will effectively reduce your delta exposure. You'd get 100 deltas from the 100 shares of GOOGL, but you'd get some negative deltas by holding the lower strike Put, or by writing the higher strike Call. So as the stock moves around, your account value would move less than the exposure equivalent to 100 shares of stock."