Secondly, I am not 100% sure that all brokers use “Sell to Close” when exiting a simple long option trade. That’s why I wasn’t specific when I said sell the option. If you can assure me, having seen the vast majority of them, that they do, then I will put it that way from now on.

Lastly, unless your option is way in or way out of the money (and I do mean “WAY”) there will be a market for it. Your broker (or any number of other sources) will be able to show you the current bid-ask. If the option is thinly traded you probably won’t like the spread very much, but if you put in a market order to sell it will get filled at the prevailing bid. Notice I specifically said “market order” there as no one is required to act on a limit order you put in (unless it matches the current bid, in which case it will automatically be filled upon submission).

If the market maker you bought from is the only one making a market for that option (meaning no one else is putting in bids or offers), then they effectively do have to buy it back from you. If they have a bid in the system when you put in your market sell order, then they must take the trade that results.

I do agree with you that leaving it to the last minute is not a good idea. I won’t go so far as to say is has to be the 1st day of the expiration month, though, as some options have very good liquidity right up to the last day. What I would say, however, is that because of the acceleration of time value depreciation in the final month, I personally sell at least a month out. In fact, when I put on the trade in the first place I do so such that the move I’m looking to play will happen with about a month left on the option. If I wish to let it run further, I roll into a new option further out in time. The one exception would be for a trade where I expect the holding period to only be a matter of days.

You missed the question in part, as he said no one talks enough about this and they seem to just phase out when it comes to what is known as a simple answer. HELLO. Is anyone in there? Jesus

You sell the option back to the market but what if no one buys it because the interest in that option is low or if the options are over bought or it is to close to the expire date and everyone is selling or trying to? What happens? This wonderful and exciting way to play the stocks becomes a real headache or you get screwed. Oh we can’t tell you that because then no one will like the risk and we can’t peddle our wares to people who don’t like our product very much. TO BAD. Damn it tell the truth. If you wait to long there is a real possibility that you could be stuck with your option even if it is in the money. What if I don’t have enough money in my margin account to exercise the option and simply can not afford to buy the stock to sell on the open market. What happens? You’re screwed that’s what happens. You end up having to let the option expire and you lose it all. And as an added bonus your brokerage account will most likely be suspended for 90 days for violating the SEC rules.

What do I do then? Sell the dam thing well before the expire date. I mean well before if it not well traded. What does well before mean? Like by the first of the month that it expires on; that’s what it means. What if it hasn’t moved up yet? Then you have to wait close to the expire date and you risk not finding a buyer. Doesn’t the market maker have to buy the option back. ( If I am wrong please say so and thus you would be answering the question. However I believe I am correct. ) The answer is “NO”. The market maker does not have to buy the option back.

Like the person who posed this question I am not sure and that’s why I answered it in this manner. If I am wrong I hope that John will correct me here but like most bloggers/newsletter writers he won’t look back and see this. John if by some miracle you do happen to read this please just edit it so the simple correct answer appears at the top easy for people to find and read. Or if you’re not sure then be honest and say so.

This may be a dumb question but I dont trade options so I was wondering

How do stop-losses (if there are at all) work for options?
Do they “stop” you out if the option price reaches a certain level or if the price of the underlying security reaches a certain level.

Good answer. Exercising is almost always the wrong thing to do when trading equity options. It far better to sell the option in the open market – but at a limit price. Entering ‘market orders’ is not a good idea.

“It also should be noted that while in the stock market, if you are holding an option and do not exercise it the option will expire and that will be it.”

Not true. Any equity or index option that is in the money by one penny, or more, is automatically exercised – unless the option owner notifies the broker ‘not to exercise.’

Mark