Options trading presents traders with a pivotal decision: allow positions to expire or close them prematurely. This choice applies to both buyers and sellers of calls and puts. Below, we analyze the four primary option scenarios—long calls, short calls, long puts, and short puts—and offer actionable insights for optimal decision-making.
The Four Scenarios in Options Trading
1. Long Call Options
Purchasing a call option grants the right to buy the underlying asset at the strike price.
Holding to Expiry:
- In the Money (ITM): Exercise the option to buy the stock at the strike price, securing the intrinsic value (stock price minus strike price).
- Out of the Money (OTM): The option expires worthless, with losses limited to the premium paid.
Closing Early:
- Sell the option to lock in intrinsic and time value, mitigating risks of price reversal.
👉 Mastering long call strategies
2. Short Call Options
Selling a call obligates the seller to deliver the underlying stock if exercised.
Holding to Expiry:
- ITM: Must sell the stock at the strike price, potentially incurring losses if the market price exceeds it.
- OTM: Keep the premium as profit.
Closing Early:
- Buy back the call to cap losses, though this may reduce profit potential if the stock reverses.
3. Long Put Options
Buying a put provides the right to sell the underlying asset at the strike price.
Holding to Expiry:
- ITM: Sell the stock at the strike price, profiting from the difference between strike and market price.
- OTM: Option expires worthless; loss equals the premium paid.
Closing Early:
- Sell the put to capture remaining value, avoiding downside risk.
4. Short Put Options
Selling a put requires buying the underlying stock if exercised.
Holding to Expiry:
- ITM: Must buy the stock at the strike price, potentially at a loss if the market price is lower.
- OTM: Retain the premium as profit.
Closing Early:
- Repurchase the put to limit losses, though this may be costlier if the stock stabilizes.
Critical Factors Influencing the Decision
1. Time Value Dynamics
- Long Options: Early closure captures time value.
- Short Options: Time decay favors holding until expiry unless ITM.
2. Stock Price Trends
- Bullish moves benefit long calls and harm short calls.
- Bearish moves favor long puts and disadvantage short puts.
3. Premium Impact
- Sellers: Premiums offset ITM losses.
- Buyers: Premiums represent maximum risk for OTM options.
👉 Advanced options trading techniques
Case Study: Short Call on Amazon (AMZN)
Scenario: Sold 20 AMZN $200 strike calls expiring in 3 days. Current stock price: $210 (ITM). Premium received: $4,000 ($2/option).
Choices:
Let Expire:
- Intrinsic loss: $10/option × 2,000 shares = $20,000.
- Net loss after premium: $16,000.
Buy Back Early ($11/option):
- Cost: $22,000.
- Net loss after premium: $18,000.
Outcome: Letting expire saves $2,000, assuming no further price spikes.
Risk Management Strategies
- Alerts: Monitor critical price levels.
- Rolling: Extend expiry to manage risk or collect additional premiums.
- Hedging: Offset positions with shares or complementary options.
Tax Considerations (Europe)
- Exercise: Triggers capital gains/losses on the underlying asset.
- Early Closure: Taxes apply only to the option transaction, simplifying reporting.
FAQs
Q1: When should I close a long call early?
A1: Consider closing if the stock plateaus or if time value is high and volatility may drop.
Q2: How does time decay affect short puts?
A2: Time decay benefits sellers; holding longer reduces the option’s value.
Q3: What’s the biggest risk for short calls?
A3: Unlimited losses if the stock price surges ITM.
Q4: Can rolling options reduce risk?
A4: Yes, extending the expiry can defer losses and collect more premium.
Q5: How are options taxed in Germany?
A5: Profits are taxed as capital gains; losses can offset other investment gains.
Final Thoughts
Your approach to options expiry hinges on market outlook, risk tolerance, and strategic goals. Tools like hedging and rolling positions can optimize outcomes. Whether buying or selling, informed decisions enhance portfolio performance.
What’s your go-to options strategy? Share your insights below!