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Put and call options are a great way to earn money or limit losses on your investments like stocks. Your option is a success when it hits the strike price (or moves towards it) and you can either sell or exercise the option.
But, can you sell a put or call option before it hits the strike price?
You can sell a put or call option before it hits the strike price since you’re allowed to sell the option at any time. You can even buy and sell the same option on the same day if it makes a strong move in the direction that you expect and you are happy with your profits.
If you don’t sell the option before the expiration date and it is out of the money, it expires worthless. However, if there is still plenty of time until expiration there will still be a lot of value to the option even if it hasn’t hit the strike price yet.
In this article I will try explain why you might want to sell a put/call option before it hits the strike price and what happens if you try to sell a put/call option that hasn’t hit the strike price on the expiration date.
You can also use some of the resources to learn more about put and call options and how to trade them.
Selling Options Before They Reach the Strike Price
There are a few reasons why you might want to sell an option before it reaches the strike price. The biggest one is that you think the security won’t reach the strike price, and you want to sell the option to earn some or all of the premium cards that you paid back.
You also might sell the option to secure the profits that you have already made if the option has moved towards the strike price but hasn’t passed it yet.
For example, say you bought a call option for a stock with a strike price of $10 and two weeks till the expiration date. If the stock is only trading at $9.50, and you see very little possibility of the price increasing above ten dollars in the next two weeks, your option is likely going to expire with no value.
If you want to earn back some of what you paid (or take profits depending on when you bought the option), you can sell it to another investor. Although you might believe that the stock won’t go up further there will be some investors who disagree and will want to buy the option expecting it to go above the $10 strike price.
So you may want to secure a profit (or make sure you don’t lose any more money) by selling the option now.
Say you purchased the option for $1 with thirty days until the expiration date. If you choose to sell it two weeks out from the expiration date, you may have to sell it for less than one dollar and only earn some of your money back.
However, if the stock was at $8 when you bought the option for $1 with one month until expiration and it is now at $9.50 with 2 weeks until expiration it might be worth $1.25 meaning you have a 25% profit despite the stock not hitting the strike price yet.
The same is true for put options. If you don’t think the price of the stock will fall below the strike price, you won’t end up exercising the option. You can sell it to another investor and depending on what the stock has done since you bought it you might have a profit or loss.
Selling Options At Expiration
You can sell an option on the day of expiration that hasn’t hit its strike price but it will be virtually worthless unless the stock is incredibly volatile. An option like this is considered out of the money, and it’ll expire with no value at the end of the day.
So an option on the day of expiry will typically not be worth much.
Put options are out of the money for the option buyer when the current stock or security price is above the strike price. Call options are the opposite of puts. They’re out of the money when the stock or security price is lower than the strike price.
You can sell a call or put option that is in the money or out of the money on the day of expiration but there will be little value to the out of the money option and the in the money option will normally only be worth the amount that it is above or below the strike price (depending on if it’s a put or a call).
The only reason that you can sell out-of-the-money options before they expire is that they still have time to become an in-the-money option. The likelihood depends on the volatility of the stock or other asset, time remaining before expiration, and how much the price needs to change to reach the strike price.
If you sell within one day until expiration, the option’s value will be extremely low since there’s very little time to hit the strike price, but it’s not technically worthless, as it’ll be at the end of the day when it expires.
Learn More About Options
If you want to avoid having out-of-the-money options, you should learn more about the topic of options so you can make smarter decisions when trading them.
The list of books below will teach you more about trading options. These are:
Joe Duarte Trading Options for Dummies
This is the best book for beginners to read because it explains the most important things to know about options trading in an easy-to-understand way. You’ll learn about trading options for various securities, how to avoid common mistakes that beginners often make, and how to use special types of options, like covered calls, to earn more.
Freeman Publications The 3 Best Options Strategies For Beginners
This three-part book series will teach you how to enhance your options trading with details on how to choose stocks for options, how covered calls work, and how to become a better trader, both investment-wise and mentally.
This is the ultimate guide to making an extra income by trading.
Lawrence G. McMillan Study Guide 5th Edition Options as a Strategic Investment
Finally, this book is similar to a textbook but with great exercises to help you remember and actively apply your options knowledge. This book has a lot of technical knowledge and advice, so you should read it after you are familiar with options trading and have had some practice trading them in real life.
You can sell a put/call option at any time, even if they haven’t hit the strike price yet. If you’re selling put/call options before the expiration and before it hits the strike price, you don’t think the security will reach the strike price before your option expires, and you want to try to make back some of the money you spent on the option or secure your profits.
If the stock hasn’t moved much in price you likely won’t earn back the whole premium you paid for the option, but you can cut your loss by earning back a portion of the premium by selling it early.
If the stock price has gone up (in the case of a call) or gone down (in the case of a put) but hasn’t quite reached the strike price it could still be worth more than you paid for it even if it is much closer to the expiration date than it was when you bought it.