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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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Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled Characteristics and Risks of Standardized Options before considering any option transaction.

Past performance is no indication (or "guarantee") of future results. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.

The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve. 

Charles Schwab & Co., Inc. ("Schwab") (Member SIPC) and optionsXpress, Inc. ("optionsXpress") (Member SIPC) are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.


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