As an option buyer, whether calls or puts, you have right but not obligation when it comes to how you want to exit an option position. This means that, at any time during the life of your option contract , you can choose to either:.
Many people buy options with one of two intentions: Better yet, you can close the option i. That way, as soon as your order is filled, the trade is completely shut down and you have nothing more to do with the option or the underlying stock. However, what if that position was a profitable one and you simply ran out of time with your trade? When you roll, you bank your profits and use your original investment capital to buy another option in a further-out expiration month.
You can keep the momentum going for as long as your stock is running or falling. In other words, you have an incredible opportunity to lock in your profits and limit your risk, while maintaining the same-size position. And I win that argument every time! Rolling works for long options, but what about when you are selling options against a long stock or option position to generate income?
When you sell options against your long stocks or other long options to collect premium while stocks are standing still or simply moving slowly, you do so to take advantage of time decay i. You will collect premium when you initiate the position i.
And, if the position works in your favor, the value of the option will decline. First of all, if you are in a covered call position, it is a repetitive strategy that you do month after month. This could actually turn the price of your option in the wrong direction! If the stock is trading close to your option strike, you are taking a big risk in leaving your position to the fate of the expiration gods.
That is risk you could have — and should have — removed from the table. This makes the case for not waiting until 3: Eastern on Friday to call your broker to close out! It is the individual who sold the option who is obligated to fulfill the obligation that they got paid to take on.
With American-style options most equities , option buyers have the right to exercise their option at any time during the life of the contract; sellers get assigned when a buyer exercises. As we saw in our covered-call example, the option seller was selling calls against a long stock position. The covered call strategy is best used on a stock that is in a slow-grinding uptrend.
As the call writer, you can also profit if the stock stays still or even if it moves down a little bit. However, if the call moves in-the-money at expiration i. You own the shares and can fulfill the obligation. To avoid assignment, you can buy back your short option at any time. Options expiration sounds a lot scarier than it really is. Try to think of it in a more positive and realistic light: Article printed from InvestorPlace Media, https: Hot stocks to watch this morning: Breaking news sponsored by.More...