The Problem
When I first started selling options, I had a fixation: every contract had to be held to expiration.
The logic sounded reasonable: I sold for $100 in premium. If I buy it back early for $50, aren’t I losing $50? If I hold to expiration and it expires worthless, that full $100 is mine.
I held onto this logic for about three months. It turned out to be one of the biggest mental traps I’ve ever fallen into in options trading.
My Thinking
Let’s run a real scenario:
Setup: You sold a put expiring in 30 days and collected $100 in premium.
- By day 10, the stock is up 5%, and the put is now worth only $50 (you’re up 50%).
- You have two choices:
Choice A: Close early
- Buy back for $50 → net profit $50
- Free up $2,500 in margin
- 20 days remaining — you can immediately sell the next put
Choice B: Hold to expiration
- Wait 20 days for it to expire worthless → net profit $100
- But margin stays locked for those 20 days. You can’t do anything.
On the surface, Choice B makes $50 more. But let’s factor in opportunity cost:
| Choice A (Close Early) | Choice B (Hold to Expiry) | |
|---|---|---|
| This trade’s profit | $50 | $100 |
| Margin released | Immediately (day 10) | Day 30 |
| Next trade | Sell again on day 10, collect another $100 | Can’t sell until day 30 |
| Total 30-day profit | $50 + $100 = $150 | $100 |
Closing early actually made $50 more. Because you “folded” time — what takes others one round, you completed in two.
Trading Insight
Cash flow strategies can’t be measured trade by trade. They have to be measured on a timeline.
Holding to expiration for 100% profit looks perfect, but the price you pay is locked-up time. And the most valuable asset for a premium seller isn’t any single trade’s profit — it’s capital turnover rate.
It’s like running a restaurant. A table that sits for 3 hours earns you $100, but if you turn the table in 1.5 hours, you seat two parties and earn $150. Do you maximize per-table profit, or do you maximize table turnover?
A commonly used rule of thumb: when profit exceeds 50–60% and more than half the time remains, you should seriously consider closing early. You’ve captured most of the profit in half the time. The remaining time value is no longer worth tying up your margin.
Practical Advice
- Set a closing rule: For example, close when profit hits 50% and remaining days > 50%. No more agonizing.
- Don’t get emotionally attached to any single trade: Holding to expiration and closing early are both just tools. Neither is more “correct.”
- Before deciding, ask yourself: With the margin this close frees up, can I earn back the closing cost in the remaining time? If yes, close.
- The one exception: If you have no better trade to deploy into after closing, holding may be better. But honestly — if you’re an options seller, opportunities are never in short supply.
Trading Insights #003 · To be continued