Know When To Hold And When To Sell And Get Out!

You have a position (good or bad) but now you are at a point where that one little question pops into your head, “Should I hold on to this position or sell it and get out?” We have all had the thoughts and it’s one of the hardest decisions to make as an options trader.

This kind of a decision can cost or make someone a whole lot of money and is something that should be thought about carefully. Here are some things to consider that might help make the decision a bit easier for you.

There is no right answer

Sorry to those looking for a clear “yes” and “no” answer here. But it all depends on the situation you are in and options you are trading. There have been many studies done to see what the best technique is for holding or selling. Some studies suggest you should follow your gut feeling and you will be right most of the time. Other suggest that if you have the question already you should sell out immediately since indecision will kill profits. I am indifferent and have done both. I’ve held on too long and sold out too early many times. It just depends on your own situation.

How far, how long strategy

This is my personal favorite. Ask yourself two questions: How far until my strike price is hit? How long until expiration? Generally speaking if you can answer these two questions then you are already on the road to making better trading decisions. Here are two examples:

• Example 1: You are long a $115 strike CALL on ABC stock which is trading at $100 right now. Your option only has 4 days left until expiration. Here the answer is easy – GET OUT! Save whatever money you can now because the probability of ABC trading higher by $115 in the next 4 days is slim at best.
• Example 2: You are long a $105 strike CALL on ABC stock which is trading at $100 right now. Your option has 34 days left until expiration. Here the answer is again very easy to make (assuming you don’t think the stock is topping out). You have plenty of time left until expiration and your profit zone is within reach. Hold on and monitor the position closely.

What’s the goal of the strategy?

The third and arguably most important questions: What’s the goal? Are you hedging with options or speculating? If you are hedging with some PUT options and it’s getting close to expiration, just keep the options open. Sure you may lose another $5-10 per contract but if you are using those options to hedge against a possible huge loss, you’re better off to have them as insurance in case something crazy happens. Do I dare remind you of the “Flash Crash”…