Can We Exit Option Before Expiry: Timing is of utmost importance when it comes to being profitable in the stock market. By timing, we mean the timing of when to enter and exit from a security in the market.
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To earn the maximum profits, Individuals have to buy a security at its low and sell it near its high when they are bullish. When the individuals are bearish, they have to try to short/sell near the highs and buy near the lows.
Especially when it comes to volatile security like options, entering and exiting the contract is crucial to be profitable. But the question “can we exit options before expiry or do we wait until expiry to settle an options contract?”
In this article, we will answer the question, can we exit option before expiry?
What Is An Options Contract?
An Options contract is a financial contract whose value is based on an underlying asset. It is entered between two parties, that is the buyer and the writer/seller at a predetermined price to be executed on or before the expiry date mentioned in the contract.
The options contracts are divided into types: Call option and Put Option
A Call option is an option contract where the buyer of the options contract has the right to buy the underlying asset at a predetermined price, but not an obligation to do so.
The writer of the options contract receives a premium from the buyer for giving up the right to execution. A call option is bought when you are bullish on the market.
A Put option is an option contract where the buyer of the options contract has the right to sell the underlying asset at a predetermined price, but not an obligation to do so.
The writer of the options contract receives a premium from the buyer for giving up the right to execution. Put Options are bought when you are bearish on the market.
You Can Also Check Out Our Webinar On Options Trading – Learn to Trade Options!
What Is Expiry Date?
As an Options contract is a formal agreement entered between two parties to buy and sell an underlying asset, they set a date on or before which the contract can be executed. This date is known as the Expiry Date.
Can We Exit Option Before Expiry?
Yes, the options contract only exists for a specific period of time and can to exited by either of the parties before the Expiry. Following are the ways in which you can exit an options contract:
For The Buyer Of An Option:
If the buyers of an options contract want to exit their positions, they can square off their contracts by selling the same number of options (contracts) that they have purchased which are of the same underlying asset, maturity date, and strike price.
Example: If you have purchased 10 lots options with a lot size 500 and a strike price of Rs 100, which expires at the end of December. In order to square off your position, you must sell the 10 lots that you have purchased.
When you sell all your positions in order to square it off, you become a seller of an option for which you receive a premium. The difference between the premium paid and received while buying and selling your option will be your profit or loss.
For The Seller Of An Option:
If the sellers of an options contract want to exit their positions, they can square off their contracts by buying the same number of options that they have sold which are of the same underlying asset, maturity date, and strike price.
Also Read: What Is Expiry Date In Indian Stock Market? – Basics Of F&O!
In Closing
In this article, we discussed what is an options contract, expiry date and answered the question “Can we exit option before expiry?” and also discussed ways on which you can exit your positions.
On a concluding note, one should know that if the positions are not squared off by ourselves before the expiry, it will be settled by the exchange on our behalf for which you might be levied extra charges.
Also, during the day of expiry, as all the positions are getting liquidated, there will be a lot of volatility in the market which may extra to unnecessary losses.
So it is preferable to for individuals to exit their positions one day in advance if they are already in profit.
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