Buying Out Selling An Option Before Expiration

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Cashing out your Options

So, you’ve bought or sold an option to open a long or short position. What now?

Option outcomes: Calendar year 2008

Source: Options Clearing Corporation

Some beginning option traders think that any time you buy or sell options, you eventually have to trade the underlying stock. That’s simply not true. There are actually three things that can happen.

  1. You can buy or sell to “close” the position prior to expiration.
  2. The options expire out-of-the-money and worthless, so you do nothing.
  3. The options expire in-the-money, usually resulting in a trade of the underlying stock if the option is exercised.

There’s a common misconception that #2 is the most frequent outcome. Not so. Outcome #1 is actually the most frequent. That’s why it makes so much sense that we listed it #1.

If you have a trade that’s working in your favor, you can cash in by closing your position in the marketplace before the option expires. On the other hand, if you have a trade that’s going against you, it’s OK to cut and run. You don’t necessarily have to wait until expiration to see what happens.

The fact that option contracts can be opened or closed at any given point prior to expiration leads us to the mysterious and oft-misunderstood concept called open interest.

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Can You Sell Call Options You Purchased?

A call option gives the buyer the right, but not the obligation, to purchase a stock at the call option’s strike price on or before the contract’s expiration date. When you buy a call, you go long and have the “option” of buying the underlying stock at the option’s strike price. You do not have to exercise this option, however. Instead, you also have the right to close your long call position by selling it in the open market.

Exploring Options Terminology

Options are one variant of what is known as a derivative. Derivatives are sold as part of contracts which fundamentally dictate the time and value that a particular asset can be traded for. Options pricing can be influenced by a number of factors, including market volatility, interest rates, the amount of time until an options contract expires, as well as the current price of the asset in question.

Options are traded within the derivatives market, which can be divided into two primary arenas. Within the over-the-counter derivative marketplace, or OTC for short, these contracts are negotiation between a buyer and seller without the use of an exchange or other third-pary. With exchange-traded derivatives, however, investors buy and sell derivative contracts that have first been defined and standardized by a single exchange.

To understand if you can sell call options you purchased, you must first wrap your head around basic options terminology. When you “buy to open” a call option, you give yourself the right to purchase the underlying stock at the option’s strike price on or before the contract’s expiration day. For instance, if you buy a $15 call option on stock XYZ with an August expiration, you can exercise your option to buy 100 shares of the stock for each option contract you own at $15 per share on or before the August options expiration date.

Sell to Close

As the owner of a call option, you can elect not to exercise your option to buy the underlying stock. In most cases, investors who do not exercise their option usually sell it. When you do this, you “sell to close” your position. In this case, you have sold a call option that you originally purchased.

Evaluating Profit or Loss

Just like when buying and selling shares of stock, you realize a profit or loss when you sell to close a call option contract. When you purchase a call, you pay a premium for the right to buy the underlying security. Depending upon the movement of the underlying stock, you can sell the call position to close prior to option expiration day for a premium that is either higher or lower than your purchase price. Many factors, including how much time remains until options expiration day (time decay), impact the price.

Assessing Options Expiration

Every derivatives contract being traded carries with it a specific day and time of expiration. In the options marketplace, the term ‘options expiration date’ is used to define the last day in which an options contract can remain open. Traders holding the options contract are forced to close the contract prior to the expiration date, or more specifically, the expiration time. Profit or loss on the options contract will occur at this time.

As the Chicago Board Options Exchange website explains, options contracts can expire worthless. Generally, if you own a call option that is “in-the-money” (the market price of the underlying stock at expiration is higher than the option’s strike price), your broker will exercise the option for you and you will purchase 100 shares of the underlying stock for each contract you own. If, however, the option is out-of-the-money at expiration and you have not sold to close your position, it will expire worthless. This simply means that the option no longer has value and you will lose the entire amount of your original investment.

Buying Out: Selling An Option Before Expiration

Forex trading is an online business opportunity, which deals with the trading of foreign currencies and assets, without any need of actual presence in the market. By making a guess about the expected currency rates or value of assets; such as gold or silver you can make revenue through an invested amount. The best thing about this business is that it can be easily controlled from your computer without any physical effort. The binary option is one of the trading modes which can be used for the pairs of various currencies; i.e. Euro/USD, Euro/JPY etc. where you can make investments by put or call options. You select a put option when you feel that the rate will get down and the call if you think it will go up.

2 Additional options

In Binary options, you have to select a trade closing time on which the trade will close in any case whether you win or lose. You can find two additional options in the Binary trading; one is the rollover option and other one is the sell (or buy out) option.

Rollover

The rollover gives you the opportunity to extend the closing time by adding around 30% more amount in your investment; you go for it when you feel that by the closing time you may have a loss.

Buy out

The other option to sell your trade; this means that if you have invested $100 for a guaranteed payment of $180 on a win, you may close it before time if you feel that by the closing time it may move against your speculation. In this case you may receive an amount which may be close to the invested amount or something in between the final payable sum, if it is still on the green side (above your expectation).

If it is already on the red side; going against the speculation, you may receive something less than the invested amount, for example $80 while you invested $100; which is though a loss but at least you manage to save a certain percentage of your money despite of the total loss.

This option is an escape zone to safeguard yourself from a total loss, but it has some pros and cons at the same time.

Pros:

  • You can sell the position anytime when you fell that it is going to conclude on a loss.
  • You can save some money out of the invested amount, if it is tending towards a loss
  • You can even earn profit from 1-79% if you make a right decision on time.
  • As a beginner you can earn smaller profits by buying a position and closing it as soon as it enters the green zone, if you are not sure about the concluding result.

Cons:

  • You can not avail sell option after a certain time, generally 5 minutes before the trade is going to close.
  • Sell option does not always guarantee 100% invested amount, sometimes you get below the invested amount even when you are in the green zone.

Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

2 Responses to “Buying Out: Selling An Option Before Expiration”

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