What is your first clue to sell an option position?

Answer 1

I am assuming you are talking about selling an existing long option position that is not part of a spread.

Unlike Kiker, I do not like to look at the percentage profit or loss. I like to look at the risk factors and, to a lesser extent, the expected reward.

One risk factor is the amount I can lose, so I'll use that as a simple example. Suppose I bought 20 calls with a $2.00 premium. That would cost me $4,000. That means $4,000 is the most I can lose. Now suppose the price of the option doubles to $4.00. That means I now an sell the options for $8,000 so I effectively have $8,000 at risk, albeit in liquid assets instead of cash. If I had wanted to risk $8,000 on the options I could have bought 40 contracts instead of 20, but I only chose to buy 20. If I thought there was a good solid reason for the increase I might no be willing to risk $8,000, but If not I would probably want to reduce my risk. If I was more bullish on the company than I was when I opened the position I might only sell 5 contracts, bringing the amount I had a risk down to $6,000. If I was just as bullish about the company as I was when I opened the position, I might sell 10 contracts and bring my risk down to $4,000. If I was still bullish, but not as bullish as I was before, I might sell 15 contracts and only leave $2,000 at risk. And if I was no longer bullish on the company, I would probably sell all 20 contracts.

As I said before, amount at risk is only one risk factor. Another risk factor I commonly consider is the theta (time decay) of the option. As a result, the closer it is to expiration the more likely I am to sell.

Other risk factors I consider include delta, gamma and vega. (I ignore rho.) Evaluation of these factors includes seeing what company events are scheduled before expiration.

Answer 2

there exists no tell-tale sign/clue that it is time to off-load a stock or an option. This is where the saavy comes in to play for the saavy investor. For me, i generally look for a percentage following a certain period.
For example: i buy a stock or an options contract prior after a company reports its earning (i would recommend waiting a few weeks to let the noise die down first), because since the earnings report, I have a conference call from the CEO to tell me where they plan on taking the company next quarter and in to the year. If the stocks metrics look good and their outlook strong, than i purchase them. Then, as the news picks up as the quarter progresses, the stock experiences spikes in the price, and so too does the demand for its options. Then, if the quarter was executed similar to what the CEO was planning, than the stock will be doing well and the metrics will be in order. This will generally indicate a positive surprise come the next earning season (3 months after the first), which will likely yield in an increase in the price. At this point I look to off load.
If its a stock, I look to off load on the day of the report. If its an option, it depends on the length of the option, as the older an option gets the less it trades in value....
so keep it within the mindset of your investment time horizon.
Think of it like a war...you need a strategy to get in, and before you ever get in, you need a clear exit strategy. NEVER stay in beyond your exist strategy..if you walk away with a 32% gain following your strategy you are better off than staying in and seeing your gain climb to 48%. Reason being is that you are now tempted by greed and not cold logic...you are now operating off of emotion...and this is a dangerous place to be playing...be disciplined...be a Marine when it comes to investing, not a pig.