Why would you sell an option at least two weeks prior to the expiration date?

Question

An answerer wrote "If the put option was unhedged (not part of a spread) I would usually want to sell it at least two week before expiration unless there was an event scheduled before expiration that I thought could have a major impact on the price of the stock." What might happen if you did not sell it at that time?

Answer 1

Well, premium of the option losses its value exponentially during the last 2 weeks prior to expiraton. For me I normally close my option postion at least 1 month before expiration unless I expect certain event to happen which might impact my option value.

Vote me for Best Answer if this helps.

Cheers

Answer 2

I suppose the intention of the option holder is to roll over the put option to a maturity date further away, because other wise I do not understand the logic. The reason for having a put options normally does not go away because expiration comes near.

What is meant is probably the phenomenon that at-the-money options lose their value relatively fast in the last weeks before expiration. In-the-money options will move almost 1-1 with underlying value at that time, and out-op-the money options will already be almost worthless.

So the cost of continuing the position will be lower when the option can still be sold with some value. The reduction of value of the near maturity date option will go much faster than the option for the next maturity, which means that the longer you wait the bigger the gap will be that you have to pay.

If indeed the anticipated (or dreaded) event takes place before expiration, it is better to keep the option because it will give you cheaper exposure to the underlying movement. When a sharp movement takes place, the value of the near and next maturity options will move almost the same, but the next maturity option will have cost more.

Hope this helps....

Answer 3

You should sell your option prior to expiration only if it is 'in the money' and you have made a profit. If it is still 'out of the money' and hope to remain so it is better to sell it to close reduce losses.

Answer 4

Since you are asking for clarification about something I wrote in a previous answer, let me try to clarify by example. While the previous answers correctly identified time decay as the reason to sell before expiration, I think an example will demonstrate the reason more clearly. For the example I will use a put with $62.50 strike price for AMGN and assume the price of the stock is $62.50. Assuming nothing else change,

90 days before expiration, the option would be worth $2.54
60 days before expiration, the option would be worth $2.12
30 days before expiration, the option would be worth $1.54
12 days before expiration, the option would be worth $1.00
11 days before expiration, the option would be worth $0.96
10 days before expiration, the option would be worth $0.91
9 days before expiration, the option would be worth $0.87
8 days before expiration, the option would be worth $0.83
7 days before expiration, the option would be worth $0.77
6 days before expiration, the option would be worth $0.72
5 days before expiration, the option would be worth $0.66
4 days before expiration, the option would be worth $0.59
3 days before expiration, the option would be worth $0.51
2 days before expiration, the option would be worth $0.42
1 days before expiration, the option would be worth $0.30
0 days before expiration, the option would be worth $0.00

As you can see, the closer you get to the expiration date the faster the value of the option decreases. Starting 90 days from expiration, it took 60 days for the option to decrease $1.00 in value. However, starting 12 days from expiration, it only took 12 days for the option to decrease $1.00 in value. Of course, the assumption that neither the stock price nor implied volatility would change over a 90 day period is extremely unlikely, but the increase in time decay would still occur even if other factors changed.

I am glad you are trying to learn more about options before you try trading them, but I don't think you will get the enough information by asking specific questions. If you go to

http://www.888options.com/

there is a bar that reads

"Home Basics Advanced Strategies Online Classes ..." near the top of the page.

I suggest you read the pages under Basic, Advanced, and Strategies to get a more complete understanding of options. The online classes, seminares and webcasts are also valuable if you want to further your education.

If there is anything you do not understand, or you have a question about what you read, Yahoo Answers is still a good source to get clarifaction, but iI don't think it is a good substitute for a strctured presentation.

Answer 5

2 reasons: 1) liquidity because it is still in demand unless it is in the money and you can get rid of it easier 2) time value falls of exponentially if the option is out of the money.