Can You Sell a Call Option Before It Hits the Strike Price?

A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase an underlying asset, such as a stock, at a predetermined price, known as the strike price, on or before a specified expiration date. This contract allows an investor to benefit from an increase in the asset’s price without directly owning the asset.

Understanding Call Option Pricing

An option’s price, or premium, reflects its market value and consists of two primary components: intrinsic value and extrinsic value. Intrinsic value exists when a call option is “in-the-money,” meaning the underlying asset’s current market price is above the option’s strike price. For example, if a stock trades at $55 and a call option has a $50 strike price, it possesses $5 of intrinsic value.

Extrinsic value, also known as time value, makes up the remainder of the option’s premium beyond its intrinsic value. This portion is influenced by factors including the time remaining until the option’s expiration and the implied volatility of the underlying asset. Options with more time until expiration generally command higher extrinsic value because there is a greater chance for the underlying asset’s price to move favorably. Higher implied volatility, reflecting larger expected price swings, also contributes to increased extrinsic value.

The presence of significant extrinsic value is a reason why call options can be valuable to sell even before the underlying asset reaches the strike price. Market participants may be willing to pay a premium for the potential future movement and uncertainty. This allows the option holder to realize a profit from the option’s appreciation due to changes in time value or implied volatility, not just from the underlying asset surpassing the strike price.

Executing a Close Position

Investors can “sell to close” their call option position at any point during market hours prior to the option’s expiration. This action terminates the option contract and allows the investor to realize any gains or losses.

Selling to close involves placing an order through a brokerage account. This differs from “selling to open,” which occurs when an investor initially sells an option they do not own. For a buyer, a “sell to close” order is the mechanism to exit a previously established long option position.

When a “sell to close” order is executed, the investor receives cash for the option’s current market price. This transaction liquidates the position, meaning the investor no longer holds the right to purchase the underlying asset at the strike price. The received cash reflects the market’s assessment of the option’s value, including any remaining intrinsic and extrinsic value.

Market Dynamics and Early Sale Decisions

Market conditions and strategic considerations can prompt an option holder to sell their call option before the strike price is reached. One common reason is to capture profits from an increase in the option’s value, even if the underlying stock has not yet hit the strike price. If the stock has moved up, or if implied volatility has increased, the option’s premium may have appreciated, allowing the investor to lock in gains.

Time decay, the erosion of an option’s extrinsic value as it approaches expiration, is another factor influencing early sale decisions. Options lose value over time, and this decay accelerates as the expiration date nears. Selling an option early can mitigate the impact of this time decay, especially if the underlying stock’s movement is not meeting expectations.

An investor’s outlook on the underlying asset may also change, leading them to decide against holding the option longer. If the anticipated price increase no longer seems likely, or if new information suggests a potential downturn, selling the option early allows the investor to exit the position. This frees up capital that can then be reallocated to other investment opportunities that align with the investor’s updated market views.

Financial Implications of Closing Early

Selling a call option before it reaches the strike price has immediate financial implications, primarily resulting in a cash settlement. Upon the execution of a “sell to close” order, the option holder receives cash equivalent to the current market price of the option contract. This amount is typically reduced by brokerage commissions, which generally range from $0.50 to $0.75 per contract, though some brokers may offer lower rates or commission-free closing for inexpensive contracts.

Once the “sell to close” order is filled, the option contract is no longer part of the investor’s portfolio. This eliminates future rights or obligations associated with that specific option, providing a clear exit from the position. The investor no longer has the right to purchase the underlying shares at the strike price, and any potential for further gains or losses from that specific contract ceases.

The financial outcome is a realized gain or loss, calculated by comparing the premium paid when initially buying the option to the premium received when selling it. For tax purposes, gains or losses from selling a long call option are generally treated as short-term capital gains or losses if the option was held for one year or less. These short-term gains are typically taxed at an individual’s ordinary income tax rate. If the option was held for more than one year, any gains might qualify for lower long-term capital gains tax rates, though this is less common for actively traded options.