Basics On Exiting An Option Position

You’re in an open option position but don’t know what your options are for exiting the option trade and/or position. For simplicity we will assume you own an option and are long (rather than short an option contract). Once you own an option, there are 3 methods that can be used to make a profit or avoid loss:

Exercise it

Offset it with another option

Let it expire worthless

Let’s go through the first one. By exercising an option you have purchased, you are choosing to take delivery of (call) or to sell (put) the underlying asset at the option’s strike price. Remember that only option buyers have the choice to exercise an option – option sellers do not have this choice but they can buy the option to close out the trade.

The second option is to offset the option trade by reversing the original transaction to exit the trade. For example, if you had originally bought a Put you would have to sell the same strike price and expiration Put to close the trade. This also works the same if you had bought a Call, you would have to sell the same Call.

Finally, if at expiration the option contract has completely no value, you can let the contract expire worthless. According to studies done by the CME, 75%+ of option buyers are “forced” into this option of exiting at trade since they make a bad initial purchase to enter the trade.

As always, remember that as an option buyer your time is limited to make a profit. Because time decay or Theta eats away at the value of an option, you have a short period of time to “make money or get out of the market”.

NOTE: In certain instances, an option may be auto-exercised by the Options Clearing Corporation. Stock and ETF options with intrinsic value > 0.25 at expiration are subject to auto-exercise. It is always best to actively manage an option position rather than allowing auto-exercise to occur and you’d be stuck with a stock or ETF that you may or may not want.