Options Article

When do you exit or close out a credit spread position?

Last Updated: October 1, 2020

Article Summary

When trading options, you can exit a position through the execution of an opposing contract of the same type, series, and expiration.

Such a transaction must take place prior to the expiration or exercise of the contract.

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Article

When do you exit or close out a credit spread position?

The short term nature of options contracts lends well to employing exit strategies prior to expiration. This is particularly true when you sell or short calls and puts or are on the short side of a spread, where your risk exposure is greater than when holding a position. The efficiency of the options market, as contracts are standardized and the options market is very liquid.

For example, an opening sale of 1 AAPL (Apple Inc.) PUT that expires on the third Friday of the month (at 4PM EST) can be closed with a closing buy of the same strike price and expiration. Conversely, an opening buy of 1 DIS (Walt Disney Co) CALL expiring in three months can be closed prior to its expiration with a closing sale.

Many options simply are not exercised and many still expire worthless. Employing some form of exit option to close out a position allows you to control your exposure to risk and either realize the short swing profit that options provide, or limit your losses before an exercise takes place. Doing otherwise seems the antithesis of trading in listed options.

RELATED READ  What are the pros and cons of options trading vs. equity trading?
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Conclusion

Unlike the underlying stock from which the contract derives its value, options are not a long-term trading instrument. Setting profit goals and trading within a profit window for small gains, duplicated many times over a consistent period of time, can make trading in options enjoyable and potentially profitable.

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