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On Options

Trader Q&A: What is a standard exit strategy for options?

Before you get into an options trade, it's important to know how to get out. Our specialists discuss various exit strategies for different options strategies.

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It's a really, really broad general question and the tough part about answering it is that there are just literally thousands of different types of option strategy. It kind of depends on what you're doing. if you're using option strategy for generating income such as selling say a cover call against a stock position that you own, your exit strategy may be that you don't do anything. You simply wait till expiration date. In fact, a lot of option strategies, your exit is sort of defined for you automatically by whatever the date the option expires.

I think the most important thing about defining an exit strategy for an option strategy is knowing what the maximum gain is. Knowing what the maximum loss is, knowing what the breakevens are before you get into the trade. In almost all option strategy, you can define most or all of those points before you get in.

Really not any difference in what we talked about with the stock knowing how much pain can you bear if it's a spread for example, and you know the maximum loss and you're comfortable with that amount then maybe there isn't an exit strategy. You just hang on to it till expiration because sometimes those will perform best as they get close to expiration. It's such a broad question and it covers such a wide range of things. It all depends on the types of strategy that you're talking about.

Lou: With options being so volatile in a percentage basis, they can really move quickly.

Randy: Sure, yeah.

Lou: You should know what you're trying to do before you get into that positions.


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