Options Forum: Pros Have Expiration Edge

When to Get Out

In his trading seminars, Sosnoff teaches clients to close out positions four to 10 trading days prior to expiration. His rule of thumb for credit spreads is that they should be closed once the value of the spreads is 10% or less than the width between the strikes. For example, if one were short a $30/$35 call spread that had a width of $5, the position should be closed or bought back when the value of the spread is down to 50 cents.

Conversely, I would suggest that a long or debit spread with a maximum value of $5 might be prudently closed or sold when it was valued at $4.50 if the position was less than one full strike in the money and there was less than one week remaining. Of course, if all strikes of the position were very deep in or out of the money, one might try closing the positions at more attractive prices.

Learning to avoid the temptation of holding a position until expiration is one of the hardest, but most valuable, disciplines for option traders to maintain. At expiration, the warning about being pennywise and pound-foolish should be heeded.