How to Exit a Call Option

Submitted by Stock Market News on 30 May, 2011 - 16:00

A guide in exiting call options

So far we have covered the advantages of buying call options, and pointers to help you decide which option to buy (or sell). Now we will cover the options that you can do when you buy the call. You don't really need to hold your position until it expires, as a matter fact most option positions close before their expiry date. You need to take one of these actions before the expiry date or your option will become worthless.

Sell your Options

If you think that the share price is not going to increase any further, you can sell your option to take profits. You don't have to wait until the expiry date to make a sale. In case the share price falls or remains steady, you can hold on to your position in hopes that the share price will increase, or you can sell to cut your loss. Even though your option will be out of money it will still have value because there is still time left before it expires.

Exercise your Options

In case you want to hold on to your position, you can exercise your call at the expiry. However, if you exercise early you will be paying for the shares in advance and sacrifice the time value left before the option expires. The only exception is when the stock is about to go ex-dividend.

Roll your Options

If you need more time, you can roll your position. This means you are closing your position and opening another one at the same time with a different price and expiry date. If you think that the prospects are much better next month, you can close your current position and roll your option. It can be done through a net debit or a net credit.

If the call you will roll into is worth more than the call you rolled out of, the roll will be done through a net debit. Its also the same if its an equal value or a lower strike. If its the opposite then the roll will be done through a net credit. You can see what your rolling for by looking at two current prices of options. Remember that when you roll a bought call, this moves the break even higher, and the share price must increase further so you can make money. Before you choose to roll your call, ask yourself if you really need the extra time. Its useless to fund this strategy if the share price is clearly moving in the opposite direction that you expect.

Each of these choices have their pros and cons depending on market conditions, and if the share price moves according to your plan.