Can I Sell My Option Before It Expires?

An option is a contract granting the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specific date. Options can be sold at any point before expiration, allowing investors to manage their positions without waiting for the contract to mature.

Selling Options in the Secondary Market

Options function as tradable securities on an exchange, similar to shares of stock. They can be sold to other market participants before expiration in the “secondary market,” where existing financial instruments are bought and sold.

When an investor sells an option they previously purchased, this is termed “selling to close” a position. This contrasts with “selling to open,” which refers to writing or shorting an option. The ability to sell to close before expiration is influenced by market liquidity, which describes how easily an option can be bought or sold without causing a substantial price change. Higher liquidity enables more efficient execution of trades, ensuring investors can exit their positions.

Factors Affecting an Option’s Value

An option’s market price, or premium, is determined by several factors. A key component is its intrinsic value, representing the immediate profit if the option were exercised. For a call option, intrinsic value exists when the underlying asset’s price is above the strike price (asset price minus strike price). For a put option, intrinsic value occurs when the underlying asset’s price is below the strike price (strike price minus asset price).

Beyond intrinsic value, an option’s premium also includes time value, also known as extrinsic value. This component reflects the probability that an option will move further into the money before its expiration. Time value steadily diminishes as the option approaches its expiration date, a phenomenon referred to as time decay or theta. This decay accelerates in the final weeks before expiration.

Market volatility also impacts an option’s premium. Higher implied volatility, which is the market’s expectation of future price swings in the underlying asset, generally increases both call and put option premiums. This is because greater expected price movement enhances the chance that the option will become profitable. Interest rates and dividends play a smaller role: higher interest rates slightly increase call premiums and decrease put premiums, while dividends tend to decrease call premiums and increase put premiums.

Executing a Sale Before Expiration

Selling an option before its expiration involves a clear procedural path through a brokerage platform. Access your investment account, typically through an online platform, then navigate to your current option holdings to select the specific contract you intend to sell.

When initiating the sale, choose the “sell to close” order type, which correctly indicates you are exiting an existing position rather than creating a new short position. Investors can select from various order types to execute the trade. A market order executes immediately at the best available price, offering speed but potentially leading to price slippage in fast-moving markets. A limit order allows you to specify a minimum price at which you are willing to sell, providing price control but with the risk that the order may not execute if your desired price is not met.

After selecting the order type, input the number of option contracts you wish to sell. Review all order details, including:
Option symbol
Strike price
Expiration date
Number of contracts
Chosen price
Upon successful execution, your brokerage provides a confirmation, and the proceeds from the sale, minus any applicable commissions or fees, will be credited to your account, typically within one to two business days.

Outcomes if Not Sold

If an option is not sold before its expiration date, different scenarios can unfold based on its value relative to the strike price. One common outcome is that the option expires worthless if it is “out-of-the-money” (OTM) at expiration, meaning it has no intrinsic value. In such cases, the option holder loses the entire premium initially paid.

Conversely, if an option is “in-the-money” (ITM) at expiration, it will undergo automatic exercise by the Options Clearing Corporation (OCC). For an ITM call option, automatic exercise means the holder will purchase the underlying shares at the option’s strike price. For an ITM put option, the holder will sell the underlying shares at the strike price.

While most equity options involve the physical delivery of shares upon exercise, some options, particularly certain index options, are cash-settled. In cash-settled options, the difference between the strike price and the underlying asset’s price at expiration is paid out in cash, rather than requiring the exchange of shares. Understanding these expiration outcomes is important for managing risk and planning option strategies.