Are you wondering when to sell stock options contracts back on the market as opposed to exercising the option and buying/selling the underlying stock in question? You’ve come to the right place.
Maybe your contract is in the money right now – or looks as if it’s headed in that direction. But, you don’t have the cash on hand to actually buy the underlying stock in question. Or, maybe you’re not so optimistic about your contract and you just want to try and recoup some of the premium you paid by selling it to another investor that may be more speculative than yourself.
No matter what brought you here, you’ve come to the right place to learn about when to sell stock options. We’re going to help you determine when it makes sense to flip the contract itself as opposed to exercising and buying/selling the stock itself.
It all comes down to forecasting what the stock price is going to do in the future – easier said than done, obviously. But as you’ll soon discover, it’s entirely possible when you set yourself up with the right software and a bit of know-how. VectorVest doesn’t just tell you what to buy – it tells you when to buy and sell it too!
Before we explain how this tool can transform your investment strategy to save you time and increase your profits, let’s talk a bit about what it means to sell stock options.
Can You Sell Stock Options Contracts?
First – is it even possible for you to resell your stock options back on the market to other investors? Absolutely!
Options contracts are tradable financial instruments, and they can be bought and sold on an options exchange. When you sell your options contract to another investor, you’re effectively transferring your right to buy or sell the underlying asset (depending on the type of option) to that investor.
The price at which you sell the contract will depend on various factors, such as the current market price of the underlying asset, the expiration date of the contract, and the demand for the contract. We’ll talk all about this later on. But now we want to talk about how exercising and selling options are different.
What it Means to Sell Stock Options (How it’s Different From Exercising Stock Options)
For beginners, buying and selling options contracts can be a bit overwhelming – which is why we encourage you to take the time to learn how stock options work before actually playing around with them. Our complete guide on how to buy and sell options is a great entry-level resource to get you started on the right path.
But the topic of today is when to sell stock options – so let’s just focus on that. What does it mean to exercise an option, exactly? And is that different from selling stock options?
When you purchase an options contract, you’re entering into an agreement that grants you the right – but not the obligation – to buy or sell stock at a predetermined price, in predetermined quantities, before a predetermined date. So – when that contract is “in the money”, you’d earn a profit by exercising your options.
Now – we want to differentiate between exercising vs selling options. The waters can get a bit murky when these terms are used interchangeably because they do not mean the same thing. As you now know, exercising your option means you’re then going to buy or sell the underlying stock in question at a strike price.
On the other hand, selling an option involves selling the option contract itself to someone else for a premium. When you sell an option, you do not have the right to buy or sell the underlying asset. Instead, you are selling someone else the right to buy or sell the underlying asset at a specified price before the expiration date.
Before we go any further, we want to point you toward our article on when to exercise stock options. If you’re wondering whether you should exercise your contract to either buy or sell an underlying stock at a pre-determined price, this article is more tailored to your unique situation. But for now, let’s get back to the topic at hand: actually selling contracts themselves.
When to Sell Stock Options Contracts as Opposed to Exercising & Selling the Underlying Stock
There are a few instances in which you’d sell stock options contracts rather than exercise the option. Maybe you’re looking at the looming expiration date and realizing your contract is not in the money – selling the contract back on the market gives you a chance to recoup some of the premium you paid.
Or maybe you just need some cash quickly, and even though there’s still ample time for your contract to get in the money you can’t afford to wait – you could flip the contract and potentially even earn a bit of profit in this way.
Either way, there are several things to keep in mind if you want to sell your stock options contract.
Factors to Consider First
If you currently hold an options contract, you likely already realize just how many moving parts there are. That’s why this is an investment strategy we recommend only to more seasoned investors. With that said, these are the factors that will influence your decision to sell stock options:
- Expiration date: Stock options have a finite lifespan and will expire on a specific date. Make sure you know when your options expire, as the value of the options will decrease as the expiration date approaches if your contract isn’t “in the money”. That means you’ll have a hard time finding a buyer that’s willing to pay an attractive price.
- Strike price: The strike price is the price at which you can buy or sell the underlying asset. If the current market price of the underlying asset is higher than the strike price, your options are said to be “in the money” and have a significant value. If the current market price is below the strike price, your options are “out of the money” and may have little or no value. Thus, your contract is essentially worthless – and attempting to sell the contract would be difficult.
- Market conditions: The value of your options will also depend on the current market conditions. Factors such as interest rates, volatility, and the overall health of the economy can all impact the value of your options.
- Tax implications: The sale of stock options can trigger taxable events. So if you want to stay under a certain tax bracket – and exercising your options would push you over the edge – it may make sense to save on taxes by flipping your contract and taking less profit. This is something you can learn more about in our article discussing taxes on options.
- Liquidity: Depending on the specific stock options you hold, there may be limited liquidity in the market. This means that it may be difficult to find a buyer for your options, or you may have to accept a lower price than you had hoped. In this case, you may be better off holding onto your contract to hopefully end up in the money.
- Diversification: If you have a large portion of your portfolio in stock options, consider diversifying your holdings to reduce risk.
So, What is the Best Time to Sell Stock Options?
Now – with all that said, what is the best time to sell stock options? It really depends on the contract itself.
First, ask yourself this: do your stock options hold any sort of value? If your contract is out of the money – and the time horizon is short – you’d have a hard time finding anybody willing to take the contract off your hands.
But if your contract is in the money and holds value, you need to then ask yourself whether it makes more sense to flip the contract for a profit or exercise the options yourself. Keep in mind that you need the capital on hand to actually purchase the underlying stock in question for call options contracts. And if you don’t have that capital on hand, selling your contract makes the most sense. You still earn a profit this way.
However, most of the time when your contract is in the money, you stand to gain more from simply exercising the option yourself. But let’s say you exercise your stock option and either
Never Wonder When to Sell Stock Options Again: VectorVest is Here to Help
Learning how to pick stocks for options trading is just one element of successful options trading – but it’s undoubtedly the most important. If you’re able to consistently uncover opportunities to buy and sell options contracts that end up in the money, you can make a killing incorporating options into your investment strategy.
And these days, you don’t have to rely on outdated techniques for analyzing stocks – like moving averages or complex technical trading indicators. With the right software, you can work smarter, not harder. Wouldn’t it be nice to increase your success rate while working less? That’s exactly what VectorVest’s stock analyzer software allows you to do.
It’s based on a proprietary stock rating system that has outperformed the S&P 500 for decades in a row. By incorporating it into your strategy, you can effortlessly find great stock opportunities for which you can create favorable options contracts.
Whether your goal is simply to buy and flip the contract itself or your strategy involves actually exercising the options, and then selling the stock for a profit – VectorVest can help. And, you can take the strategy anywhere you go with the stock advisor app. Once you see what’s possible with VectorVest, you’ll never look back. Get a taste of how the system works with a free stock analysis today!
Final Thoughts on When to Sell Stock Options
Hopefully, this quick guide on when to sell stock options helps you feel more confident in what your next steps should be.
Sometimes, it makes sense to flip the options contract and sell it back to another investor rather than exercising the option yourself. This may be the case if you’re not optimistic about the outcome of the contract, you don’t have the capital necessary to actually exercise the option, or your strategy simply involves creating and selling options contracts to other investors.
But no matter what your investment strategy entails, one thing is certain – with VectorVest, you can enjoy less stress and higher returns – with less time spent in front of your screen.
If you want to learn more about stock options for beginners, you can explore our blog. We have great resources on risk management options trading, the difference between warrants and options, the difference between stock and options, swing trading options, stock option expiration dates, or even the best way to learn options trading.
You can always count on VectorVest for not just helpful, in-depth resources – but also our world-renowned stock forecasting software!