Updated: Dec 28, 2017
There are different ways in which to handle when to close an option position.
Many people will typically hold an option position until the very end of expiration, as they either feel they want to get the most out of the trade and hold as long as possible, or they don’t realize they’re allowed to get out sooner.
Sometimes holding until the end is a good strategy and sometimes not.
If you bought an option and it doubles in price, is that good enough for you?
Over the years, I've seen investors holding profitable option trades turn into losers because they didn't take profits when they had the opportunity.
It's key to have an exit strategy. Unlike stocks, options have an expiration date and many need to be acted upon before that time. You don't need to hold until expiration.
In my opinion, you should get out of a winning position once you feel the underlying may have reached a certain area. What area? An area which you have decided ahead of time that meets your criteria.
You can also get out of a winning trade if the option doubles in price. Take profits on your original stake and let the rest ride.
With a losing position, you should set a stop-loss area on the underlying stock (not on the option price itself). If the underlying moves say 25% beyond your entry area in the wrong direction (for example), then you could look to close the trade.
In the end, getting out of an option trade is an individual decision, so the above examples are just some ways I look at it.
What's your strategy? Give us your comments.