Likes ReceivedOptions - How to Correctly Choose Between Exercising and Closing Positions
When an option is in the money, is it better to exercise it or simply sell it?
This is a common dilemma many traders face, especially when their Call or Put option finally "hits" and becomes in the money, prompting thoughts of whether to "cash in" by exercising. But is exercising better or is selling (closing the position) the smarter move? Many traders don’t even know what the strike price is. Today, I’ll break it down in plain terms—don’t let the jargon intimidate you; it’s really not that complicated.
What is exercising? What is closing a position?
Exercising: This is when you actually use the right granted by the option—buying the stock for a Call or selling the stock for a Put.
Closing the position: If you don’t want to actually buy or sell the stock, you sell the option to lock in your profit.
For example, if you bought a Tesla Call with a strike price of $350 and the stock rises to $370, you can:
Exercise the option, buy the stock at $350, then sell it at $370, making $20;
Or, you can simply sell the Call, and the market might give you $21 (because, in addition to the $20 intrinsic value, there’s $1 of time value), netting you an extra $1!
That extra $1 is the time value—a "closing position bonus." You get it as long as you sell.
Why is closing the position usually the better choice?
Extra "time value" profit
There are people in the market willing to pay for time, and you can pocket that extra bit.
Less hassle—no need to worry about having enough cash to buy the stock
For instance, if your Call is in the money and you want to exercise, you might not have hundreds of thousands in your account to buy the shares.
Especially with cash accounts—sometimes you can’t exercise if you don’t have margin.
Higher fees for exercising, and you might even get hit with settlement fees
You might accidentally trigger an automatic exercise, which could end up costing you.
When should you consider exercising?
I’m not rigid—here are a few scenarios where exercising might make sense:
You actually want the stock and see this as a chance to build a position at a discount.
The contract is near expiration, liquidity is poor, and no one wants to buy it—you can’t even sell it.
You’re a seasoned U.S. stock trader with specific tax strategies, aiming for long-term holding benefits (though most domestic investors don’t need to worry about this).
My insights and advice
Over the years, transitioning from sell-side to buy-side and from short-term to long-term trading, I’ve seen too many beginners unsure what to do with in-the-money options—either losing time value or getting forcibly exercised, only to wake up with thousands of shares in their account, utterly confused.
My advice is simple:
If you don’t plan to hold the stock long-term, just close the position and lock in your profit—time value is real money.
If you do want the stock, make sure you have the funds ready—don’t let the system exercise for you and blow up your account.
Use platform tools—set reminders or take-profit lines; don’t rely on the system to figure out the best move for you.
Options aren’t mysticism—they’re tools with rhythm, logic, and strategy. The key is knowing what you’re doing; otherwise, you’re gambling, not investing.
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