Selling options before their expiration

Ted Capwell

Trades on futures financial markets on the internet have expiration periods. A feature of options is their fixed duration, which is set at the time the trade is opened and cannot be changed later. The point of exiting the market is called the moment of expiration. That is when the trading outcome is registered based on the direction in which the price moved. However, the functionality on some trading platforms allows you to close trades ahead of schedule with partial registration of trading outcomes. This will be the topic of our article. We will consider the trading method of early expiration in terms of trading efficiency.


Selling options before their expiration


The sale of options before their expiration allows you to get part of your investment back. As you know, options trading is different in that profits do not depend on price fluctuations, only on the direction of the trend. However, with early expirations, the situation is different. A floating rate of return is set on trading platforms, and it directly depends on how far the price goes in the opposite direction from the forecast. Also, the time that passes since entering the market is taken into consideration. The more time, the lower the percentage. On average, it is possible to get 20 to 60% in returns when trades are closed.

This opens up new opportunities for traders. Special trading strategies have even been developed for early trade closures. This point will also be mentioned in our article. As for hedging and risk management, there are even more opportunities. The introduction of this functionality on options platforms has made this product more attractive to professionals who previously traded on Forex.

When is early expiration justified?

Unprofitable trades, the ones where the price goes in the wrong direction, always close. The functionality allows you to exit the market even if the situation is successful, when it looks like you’ll get a safe outcome for your trading operation. However, in this case, instead of a full profit (70-90%), you’ll only get 50-60%. The answer to the question above is obvious – an early unplanned exit from the market is justified in cases where it is obvious to the trader that they will not make a profit on their position. In such situations, it is more profitable to get at least a certain percentage of the investment back rather than losing 100% of the money invested, as will be the case if the trade closes normally within the established expiration. But it is worth noting that in practice, such situations do not happen too often.

We have already mentioned that there are special trading strategies based on early closure. The idea behind them is that the trader must simultaneously open two identical trading positions in different directions. Entry to the market should be carried out immediately before a jump in volatility. As a rule, trades are opened right before the release of key news. This is when activity on the exchange increases and there are sharp price jumps. The “Economic Calendar” is usually used as a news source for this.

Some time after entering the market, when it becomes clear in which direction the price will go in regard to the news, the unprofitable trade will close early with a return of part of the amount invested. And the profit from the second option will cover the losses on the first, and will even provide a certain profit. This strategy allows you to get on average about 20-30% of the total amount of money spent on opening the two trades.

However, there are also risks of leaving the market with zero profit and a double loss when both transactions close with losses. The thing is that when trading on the news, there may be short-term price fluctuations that do not reflect the global trend. And after 1-2 minutes the chart can reverse in the opposite direction. Therefore, in order to trade with profit on this strategy, the trader must understand fundamental analysis in order to more accurately predict market reaction to different events.

Effective ways to get out of unsuccessful trades

The risk management system in the field of options trading differs somewhat from the classic approach which is used on Forex and other futures markets. The option itself has limited risk, which under no circumstances can exceed its price. Therefore, when opening a trade, the trader must calculate all the risks in advance. This is the main principle of money management.

Early closure of a trade will allow you to return a portion of your investment only in the first half of the expiration period. And for the remaining time period, it is quite realistic that the situation on the market will change and the trend will reverse. This works for any expiry term – for 1-minute turbo options and also for transactions that last several hours. Therefore, it makes more sense to act differently in this situation. Without closing the first trade, we buy a second option in the opposite direction. And the expiration is usually the same. This ensures that at least one transaction will close with a profit.



“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”