Closing short OTM options for cents, rather then let them expire

Discussion in 'Options' started by kiwi1, Sep 7, 2010.

  1. kiwi1

    kiwi1

    I heard many times that one should
    close out short OTM options at pennies,
    rather then let them expire shortly.

    In case of conservative credit spreads
    those pennies are a big chunk of profits.
     
  2. It's not worth it to be outright short an option that's worth a few cents... It's a different kettle of fish if it's a spread.
     
  3. spindr0

    spindr0

    I think it depends on the circumstances, eg. how much time remains, how far OTM the short leg is and if you have designs for next month.

    For example, suppose the UL has risen only modestly and you intend to sell next month at exp. Then, I'd look at covering the short leg for pennies and selling next month's spread in a ratio, even if the short leg is a strike further away the near month's long leg. Why not sell five weeks of premium instead of four? You don't have to buy as many next month long legs until the near month expires.

    Prior to near exp., if the UL continues up, you buy cheaper long legs at expiration. If it drops, you have far more long legs than short. Just hope it drops big time :)
     
  4. Shit I close out short positions that have 30-40 cents left.

    At some point you need to take your profits, holding on to the last few dimes does not make too much sense. When you see a nice fat profit, take it!! and remove risk from the table.