Could I sell and keep the $10 profit on options that I bought, or should I wait closer to the expiration date?
I bought an option for $15. for 100 shares. The other day it was up to $25. Could I sell and keep that $10 or should I wait closer to the expiration date?
Options are liquid investments just like a stock so you can sell it at any point in time. Commissions on options trades can be fairly high so this should always be factored into your decisions. Additionally, if you bought the option to hold the stock for the long term, then excercing at expiration will be your best bet. If you are simply trading options and do not plan on holding the stock, it is never a bad idea to take a profit.
One more piece of advice is that options prices can move rather dramatically so make sure you are careful and pay attention.
You can sell any time you want. If you think the underlying stock will go higher, hold on; but set a price target.
Options that are in the money always trade at a premium to their intrinsic value. When I say "intrinsic value" I mean the difference between the current stock price and the strike price on your option. The premium varies with the time to expiration. The closer to expiration the smaller the time premium, all other things equal. So if you expect the underlying stock to be at its current prive level upon expiration, you should sell your option sooner rather than later.
Part of the option cost or premium and in your case profit is the time. The closer you get to expiration, the more time decay, known as theta, you will have, espcially if it is an out-of-the-money option. The more in-the-money option will have less theta decay.
A better question is what are your expectations of the stock going forward before expiration. If the stock declines in value, the option will quickly lose it value and your profit. Options move much more quickly than the underlying stock. Therefore the conservative approach would be to book your profits and be happy unless you are really bullish on the stock going forward. This is without the luxury of knowing which stock you are referring so as to be able to access the stock based upon a chart, the stock's expected move, etc...
Hope this helps and best of luck, Dan Stewart CFA®
The longer you hold an option and the closer it gets to it's expiration date the less "time premium" it will have. If you sold the option now you would lock in a $10 capital gain on the investment and pay either short-term capital gains (if held for less than 1 year) or long-term capital gains (if held for longer than 1 year). You could also choose to exercise the option and buy the shares at the strike price if you plan on holding the underlying security for the long term.
If you are long options (bought the option contract) theta which measures the sensitivity of time decay works against you. So the closer you get to expiration, the more extrinsic value you lose, therefore the option would be worth less.
Example: You bought an at the money call option (strike 10) on stock x trading at $10.00 a share for $0.15 ($15 a contract) with 3 weeks till expiration, the entire amount that you paid is extrinsic value, the closer you get to expiration (assuming the stock is constant) the more gradually you'll lose this $15 till it hits 0 on expiration day.
Now, with the same example, assume the same day after you bought the call option, the stock rose to $10.15 (assuming it will remain at that price till expiration) and you are holding a call option worth $25. The intrinsic value of your option (in other words what the real value of the option at expiration) is $15 with $10 of extrinsic value that would gradually get less until there's no extrinsic value on expiration.
Hope this helps.