Options Strategies to Exit a Trade

The following content is intended for sophisticated option traders with substantial options knowledge. If you're not familiar with the terminology in this article, please review our options content for beginners available to Schwab clients.

The following, like all our strategy discussions, is strictly for educational purposes only. It is not, and should not be considered, individualized advice or a recommendation. Options trading involves significant risks and is not suitable for everyone. Certain requirements must be met to trade options through Schwab. Not all clients will qualify.

For all the lessons learned about how to get into a trade, not as much focus is given on how to get out. Whether you're winning or losing, at some point, you need to exit the trade in order to take a profit or chalk up a loss.

There are a number of options strategies to cover on the subject of exiting a trade, but here, we'll focus on three of the most popular—long options, vertical spreads, and calendar spreads.¹

Let's say an option trader was interested in XYZ Corp. and bought the September 50 calls for $1. Now those calls have doubled to $2. They can't be blamed for wanting to take a profit, but they're as bullish as ever and don't want to miss out on potential future gains their contracts might generate. 

Here are three potential strategies the option trader could consider:

Sell part of the position: Although this is a potential adjustment almost every time, be smart about it. Consider selling at least enough contracts to bring in more money than the initial debit. For instance, selling 60% of the calls that now trade for $2 nets a credit of $1.20 minus transaction costs. This way, a profit is more likely, even if the remaining part of the trade fizzles.

Adjust into a vertical: Turn a long call into a vertical call spread by selling a call with a higher strike. For example, sell the September 55 calls for $0.80 minus transaction costs. Even though this adds a second trade to the trader's account, they now own the 50–55 call spread, which has a total risk of only $0.20. That's calculated by taking the initial $1 cost of the 50 calls minus the $0.80 credit from selling the 55 calls.

If this spread finishes fully in the money² (ITM) at expiration, the trader can potentially realize the $500 maximum value per spread if, for example, the stock is bought for $50 after the long call is exercised and immediately sold for $55 after being assigned on the short call. However, some traders prefer to close the spread prior to expiration if it reaches a certain level of profitability, such as 75% to 80% of the maximum profit.

On the other hand, if XYZ drops below $50, and the spread expires worthless, the loss is limited to only $20 rather than the full $100.

Roll up: Cash out the long call that's made money by selling-to-close it but maintain a bullish position by "rolling" up by buying-to-open another call that's further out of the money³ (OTM). The roll likely nets a credit that reduces the overall risk. Bonus: If the credit's more than you originally paid, you've locked in profit.

Sticking with XYZ, let's now assume the trader originally bought the 50 call and sold the 55 call as a spread for $0.80 minus transaction costs. The first adjustment above—selling part of the position—is still viable. But so are the ideas of spreading off the trade or rolling it up.

Spread the spread: Butterfly spreads⁴ and iron condors⁵ are nothing more than combinations of vertical spreads. A trader can create their own combination by selling the 55–60 call spread and end up with a butterfly, with the 55 strike as the body (see table below). Calculate the new risk by subtracting the credit from this adjustment from the initial debit.

Rolling a vertical: The idea behind rolling up a vertical is the same as rolling up a single option: Take profits on the original trade, then do it again. There are more moving parts (and more transaction costs), but all you need is a "sell butterfly" order ticket.

For example, turn the long 50–55 call spread into the 55–60 call spread by selling the 50–55–60 call butterfly. Subtracting the butterfly credit from the original debit leaves the remaining net risk of the new 55–60 spread position (see table below).

The first rule of adjusting a trade is to treat the adjustment as a new position. Have profit and loss exits mapped out just as a trader would for any new trade.

Rolling the calendar: Constructing a calendar with a little time between the long and short options lets traders roll the short option. If the short option is evaporated, use a "sell calendar" order ticket to bring in a credit by closing the short option and selling the same strike option in the next expiration.

Losing trades are an expected part of trading. Sometimes, simply closing the trade is the right decision. Other times, it might be appropriate to take another action. The assumption here, though, is that traders are managing their losing trades before they've gotten out of hand.

Let's say a trader's long call is a relative mess because XYZ stock hasn't budged. But they still believe the stock is poised to move. In the meantime, to salvage some of what's left while still leaving a chance for some profit, a trader could consider converting their call to a spread.

Spreading to a vertical: As with the winning trade, consider selling a higher strike call in the same month. Deduct the credit from the original cost of the long call to arrive at the net debit of the trade.

The second rule for adjusting a trade is a trader should match their new position with their market outlook. 

For instance, if a trader initially buys the September 50 call for $7, then adjusts by selling the 55 call for $1, they net a $5 wide call spread for $6, not including transaction costs. That's a guaranteed loss of at least $1, if not the whole $6. If the math doesn't make sense, it might be time for the trader to consider closing the trade.

Spreading to a calendar: If there's enough time left in a long call, another idea might be to convert the long call into a calendar by selling a shorter-term call with the same strike. This "buys" some time for the stock to get going. And while a trader is waiting, they can potentially hedge time decay risk as well as some of the downside risk. If XYZ comes back to life, they can buy back the short option, and they're back to the original trade.

Converting to a vertical spread isn't a choice if that's what a trader starts with. But all is not lost. One possibility is to roll the entire spread further out in time using a "vertical roll" order.

To avoid adding risk to the trade, a trader would roll up the spread to strikes that are further OTM than the current spread. This may not be ideal, but the longer time frame gives the trader trade time to work.

Similar to winning calendars, rolling out the short strike reduces the trader's risk in the trade. But, because calendars tend to work best when at the money⁶, if the market moves, the trader might have to move with it. Rolling a calendar that's gone ITM, though, does have a cost. But here's how a trader could navigate an alternative strategy.

Roll the long option up/down in the same month to the at-the-money (ATM) strike. Then, roll the short option up/down to the same strike, going one expiration out in time. If the net cost of both trades is a credit, it might be a worthwhile adjustment. If it's a net debit, it might make sense just to close the trade.

Simply winning or losing doesn't mean a trader needs to close their trade, although that strategy can sometimes make sense. When a trader has a reason to stay in the trade, adjusting the trade can help them mitigate risk, take money off the table, and give them time to plan their next move.

Remember, there's no such thing as "fixing" a broken trade. Whatever a trader's reason for making an adjustment—whether exiting at a profit or a loss—it's important for them to realize the trade isn't the same one they put on. Here are some helpful guidelines to consider when adjusting trades:

1. Treat any adjustment as a new position. Map out profit and loss exits for any new trade.
2. Match new positions with your market outlook and volatility backdrop.
3. Don't make any adjustments that add risk to the trade.