Should I Hold an Option Until Expiration or Choose a Profit Target?

Some traders believe if you sell a put option, it needs to be held until expiration. Depending on the expiration, that can be a long holding period. Any holding period means exposure to the market. Your goal should be to limit exposure as much as possible. That goes against holding until expiration.

So if you aren’t holding until expiration, you must be closing the trade early, right? Right. But what is wrong with that? If you have a non-zero profit target, you will close the trade before expiration regardless, assuming the trade is going in your favor. That begs the question, what is a viable profit target?

The profit target may depend on the opening price rather than just some random number. An option that was opened for $2.00 has a lot of flexibility in where it can be closed. After all, closing at $1.00 means $100 of profit per contract. That’s not a bad deal, depending on the holding period. However, generally, options with high premiums also have high risks. Holding these high-octane options means holding some extreme market exposure.

On the other hand, opening a put at 0.85 doesn’t leave much room. In SOI and HNI, we set final targets at 0.10. But along the way, we’ll close out half at some level above the final target. Closing out half of the position removes a lot of exposure. Remember, the best exposure is zero exposure.

Sometimes the market simply doesn’t cooperate with your trade and you have no choice but to close it out at the current market price. Whether the original intention was to hold until expiration or for a profit target, all of that goes out of the window when market conditions change. That isn’t necessarily a bad thing. If you have expectations that the trade may not work out, you’ll be more prepared to pivot early, potentially damping a larger loss.

To answer the question of this post, holding until expiration is more rare than common. It means squeezing just a few more drops out of the orange. Not much return there. You have to ask if a few more cents of premium are worth the extra exposure. In most cases, it won’t be.

Setting a profit target is fine, assuming you have the flexibility to close the trade if market conditions turn.