When to close option trade

Discussion in 'Options' started by Nashequilibrium, Jul 10, 2009.

  1. Is it more optimal to close an option trade before expiry or let it run to expiry? If you know that in the next 4 days, there will be good movement, what time period option would yield the best return?
  2. If you are selling options as long as your option is out of the money you can let it expire and save a few bucks on the commission, however it is best to close it by paying the commission and take out the risk factor.

    At times you might sell an option that has 1 -2 months left but somehow you "get lucky" meaning you pick that temporary bottom or top. In that case if you make 50% of the premium just a few days after you opened the trade, you should close it and move to the next trade. Also if you get paid $1 and everything goes against you and the premium goes up to $2 or $3 you should limit your risk and close your trade by buying your options back at a loss, or if you still want to stay in the trade consider at least buying 1/2 of what you sold. It is easier to do such things when the options you trade are very liquid.
  5. Buying and selling options isn't a cookie cutter process where there's some rule that gives you the best return.

    The optimal time to close an option position is when the difference b/t the low and the high is the highest. Since that can't be known until expiration, each day you have to weigh the current P&L versus the possible P&L and factor in your outlook for the underlying for the duration as well as your fear and greed.

    IMO, the following are good things to do:

    1) Locking in profits

    2) Taking risk off the table

    3) Protecting your principal

    4) Closing 5 and 10 ct options and finding a higher profit positions whether it be by rolling in the same underlying or finding another

    Sometimes you'll be right, sometimes wrong and your results will let you know which works best and when.
  6. I don't know because I don't buy options, but if I were to buy them I'd buy options with a time frame of 6 weeks or more. You'll have a bit more room to be wrong. As you probably figured out by now when you buy an option you must choose the right stock, predict the extent of its move and forecast how fast it'll get there. In my opinion money are made not really by having limited risks at all times but by learning to manage your risk at all times.

    Alexander Elder said: When you buy options, you must make three choices, if you are wrong on just one. you'll lose money. Ever tried tossing a ball through three rings at an amusement park ? This triple complexity makes buying options a deadly game.


  7. SPIN has it right.

    Waiting for expiration is a sucker's game. Much too little to gain 'save a few bucks' and a great deal to lose. Especially when you believe the market is going to move.

    Going after the 'best return' is not a good (IMHO) idea. The 'best return' is always accompanied by the 'highest risk.'

    Find your comfort zone and trade within it. I'm always willing to let the other guy have the last couple of nickels on a trade. I believe it is much safer, and therefore a better long-term strategy, to get out of the trade when there is very little left to earn.

    Prudent risk management tells you that trying to 'save a few bucks' is not a good idea.

    Good trading.