When Should You Close a Profitable Options Trade?

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Carlisle discussed When Should You Close a Profitable Options Trade? Here’s an excerpt from the episode:

And that’s one of the things about the value options letter. Options are pretty simple the way we use them. There’s really only two scenarios, heads, the option expires, tails, you end up getting exercised, either buying the stock if you sold a put or selling the stock you already own in a covered call, pretty simple.

But tracking them, keeping track of them and knowing when it makes sense to exit, maybe there’s a fundamental change. We haven’t seen a lot of that yet, but maybe the thesis is broken, that’s one reason to sell. Another is like, okay, we’re tying up $5,000 of capital and there’s only $10 left to make all the way to January.

Let’s free it up and recycle and set a new trade, Toby.

[Tobias] One of the things we’ve talked about sometimes when you sell the put into the position and the position rallies away from you, the equity does very well. And you might think, well, maybe in that instance, I would have been better off just buying the stock long. But it’s one of the interesting phenomena of this strategy that really does identify these stocks.

Often stocks sell off more rapidly, they have this sort of increasing dip as they get close to the point where they’re about to bounce. And so that’s sort of the option volatility is a good way of identifying when you’re finding one of those, it’s getting close to the point where there’s some sort of reversal, which when you see the elevated option volatility and it makes sense to put that trade on, it’s also identifying something that’s getting closer to the end of its move. Do you think that’s fair?

[Tim] That could definitely be fair. And I’d say one thing I’m noticing right now is that premiums in the market are not huge. So really the focus has been on identifying undervalued stocks and where you already have that margin of safety and then getting a good enough premium.