Barchart.com Options Education - Exiting an Options Position

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Exiting an Options Position

Once you own an option, there are three methods that can be used to make a profit or avoid loss: exercise it, offset it with another option, or let it expire worthless. 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. Only option buyers have the choice to exercise an option. Option sellers, may experience the other side of that exercise—being assigned on the short contract and having to fulfill the obligation.

Offsetting is a method of reversing the original transaction to exit the trade. If you bought a call, you have to sell the call with the same strike price and expiration. If you sold a call, you have to buy a call with the same strike price and expiration. If you bought a put, you have to sell a put with the same strike price and expiration. If you sold a put you have to buy a put with the same strike price and expiration. If you do not offset your position, then you have not officially exited the trade.

If an option has no value at expiration, and it has not been offset or exercised, the option expires worthless and no further action is required. If you originally sold an option, then you want it to expire worthless because then you get to keep the credit you received from the option premium. Since an option seller wants an option to expire worthless, the passage of time is an option seller's friend and an option buyer's enemy. As an option gets closer to expiration, it decreases in value.

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.

It is important to note that most options traded on U.S. exchanges are American style options. In essence, they differ from European options in one main way. American style options can be exercised at any time up until expiration. In contrast, European style options can be exercised only on the day they expire, however they can be traded any time prior.

All the options of one type (put or call) which have the same underlying security are called a class of options. For example, all the calls on IBM constitute an option class. All the options that are in one class and have the same strike price are called an option series. For example, all IBM calls with a strike price of 80 (and various expiration dates) constitute an option series.

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