When to Cut an Option Trade

Larry’s Note: A few weeks ago, on September 4, one of “Trump’s 24-Hour Profit Windows” opened up right on schedule.

Anyone who followed the alert I sent that morning could have placed a simple trade with a few taps on their cell phone… and pocketed $1,050 by 4 p.m. the very same day (depending on the size of their trade).

Trump’s next 24-hour profit window opened up on September 11, right on schedule. And anyone following that trade alert could have picked up another $247… $1,235… or even $2,470 by 4 p.m. ET the same day.

So far in 2025, my system is winning 80% of the time.

If you’d like to know how to use this strategy for a chance to put triple- and quadruple-digit wins in your pocket… be sure to catch the encore presentation of “Trump’s 24-Hour Profit Windows” before it goes offline tomorrow.

Click here to see how it works while you still can.

Risk management is a vital lesson when we start trading. And for good reason…

Without correctly sizing our trades and having a predetermined exit point, our emotions can get the better of us. And a dud trade can turn into a disaster.

In extreme instances, the loss can knock someone out of the game entirely…

A stop loss on a stock is often clear-cut (such as a fixed dollar amount or a percentage). But things aren’t always so clear when it comes to options.

When deciding when to exit an option trade, there are other factors to consider, not least of which is time.

So today, let’s check out how to manage option trades…

The Trouble With Time Decay

One of the major differences between stocks and options is that options have a finite life.

If you hold an option until it expires, it ceases to have any value. So whenever you enter an option trade, your time is limited. “Time decay” starts eating away at the value of your option.

Time decay accelerates the closer the option gets to expiration. And that has a profound effect on how you manage an option trade.

Put simply, you don’t have the luxury of time…

Each day that goes by without the anticipated move happening erases a growing portion of the option’s value.

To help counter this, I typically recommend options at least two or three months out from their expiration. It gives the trade enough time for the move to play out while avoiding the worst of time decay.

All else being equal, an option loses roughly two-thirds of its value in the second half of its life. And that’s what we want to avoid.

Ideally, we’re in and out of an option trade anywhere from a couple of days to two or three weeks. That avoids the worst of the time decay.

Avoiding the effects of too much time decay is key to determining when to exit.

However, there’s another element that plays a part in managing an option trade…

When to Move On

You buy an option when you believe that a certain move is right around the corner.

Buying an option in the mere hope of a move playing out eventually is a low-probability way to trade. By the time the move plays out (if it does at all), you’ve already given up too much of your option’s value.

So another reason to exit an option position is if the trade moves against you.

For example, say I buy a call option, thinking a stock will rally off a key level. If the stock falls through that level, then I’d look to exit the trade.

Likewise, if I bought a put option in anticipation of a pullback, I’d exit if the stock continues to soar.

To be clear, I wouldn’t necessarily exit these trades immediately. We buy options with a few months to expiry to give us some leeway.

But when the thesis behind the trade fails, it’s time to exit. The trade has gone stale, and it’s time to move on.

Exiting an option might not seem as clear-cut as a stop loss on a regular stock. However, by applying two tests, you can make your decision:

1. Does the rationale behind the trade still stand up?
2. Is time decay eating up too much of the option’s value?

If either factor isn’t in your favor, then it’s time to exit and move on to the next trade.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict