options

Selling Options Before Expiration

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It's common among active options traders to sell options before their expiration dates.

Although options give someone the right to buy stock at a pre-determined price on a future date, not all investors buy them with the intention of eventually owning stock.

In particular, active traders sometimes buy and sell options the same way someone might buy and sell stocks.

This article explains why someone might sell options before expiration and shows how to go about doing it.

   

What Are Options?

Options are financial instruments that give someone the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date.

If, for example, you own a call option, hold it until the expiration date, and it expires "in the money," you may be assigned the stock associated with that option.  The price you pay for the stock will be the strike price of the call option you owned.

   

Meaning of Selling Options Before Expiration

Selling options before the expiration date means choosing to close an option position before it reaches its expiration date.

For example, if you buy an option and it goes up in value, you might want to lock in profits and close the position before the expiration date.

Some active traders, like swing traders, may prefer to buy and sell options before they expire, rather than holding them until expiration.  For those traders, they might buy and sell options the same way some people buy and sell stocks.

This video about selling options before expiration offers more information:

   

Why Sell Options Before Expiration?

There are several reasons why someone might choose to sell options before the expiration date:

1. Active Trading:  Some active traders, like swing traders, may not be interested in owning the underlying stock associated with the option. Therefore, they prefer to buy and sell options before they expire.  Options are leveraged, which offers a way for active traders to dial up the potential risk and reward of their trades relative to stocks.

2. Lock in Profits: An investor or trader may have made a substantial profit from their position in an option. To ensure they don't lose those gains, they may choose to sell the option before the expiration date.

3. Manage Risk: Selling options before expiration can be a part of a risk management strategy. By closing a position early, traders can mitigate potential losses and ensure they don't face any unforeseen movements in the market or in the underlying stock.

4. Avoid Stock Issuance: If an option expires in the money, the owner may be issued the underlying stock. Some traders might prefer to avoid this scenario and instead choose to sell the option before expiration.

5. Market Conditions: Depending on the market conditions, a trader may decide it's in their best interest to close out a position early. This could be due to changing volatility, news events, or other factors.

   

How to Sell Options Before Expiration

Selling options before expiration requires that you have an existing option position open.

As far as how exactly to do it, the instructions will depend on your trading platform. We'll offer instructions here for how to do it in the Thinkorswim trading platform, but even if you don't use that platform, these instructions might give you intuition about how to sell options before expiration in your own trading platform.

From within the Thinkorswim desktop platform, you take these steps to sell an option position before expiration:

   

Right-click the Position: Find the open option position in your platform.  In Thinkorswim, it might look like this:

You can right-click on the specific option position you want to sell.  

   

Select "Sell": From the menu that appears after right-clicking, select the option to sell.  

Some trading platforms want you to indicate "Sell to Open" or "Sell to Close".  Since you would be closing an existing position, you can select "Sell to Close".

   

Set Quantity and Price: In the order setup window, input the quantity of options you want to sell. This amount should be less than or equal to the number of contracts you own if you are trying to close an existing position.  

You have the option to use a "limit order" if you want to specify a minimum exit price, or a "market order" if you want to exit the position immediately at the prevailing highest bid.

   

Confirm and Send: After setting up the order, click on "Confirm and Send" to review the details and submit the order.

In the case of a market order, the sale will occur immediately with most brokerages assuming it's during normal market hours.

In the case of a limit order, it will execute only when the option price reaches the specified price (also only during normal market hours).

   

Learning More About Selling Options Before Expiration

You can contact us any time if you would like to ask any questions about selling options before expiration, or about trading in general.