Long Call: To Trade a Long Call Option or to Hold it till Expiry?: Options, Futures, Derivatives & Commodity Trading

# Long Call: To Trade a Long Call Option or to Hold it till Expiry?

Options are valued using various quantitative methods. The most commonly used model is the Black-Scholes Model. Although some other valuation methods are also used, like Binary Tree Model and so on, but all of them give almost similar values for pricing options.
So a big question that comes to the mind of an options trader who has a Long Call Option Position is that Whether to Square off or close the Trade on the long call position if in profit, OR to hold it till expiry.

As explained in the article Options Time Decay: Time Decay in Options Explained with Examples, options have time decay value. As time passes by the time value of an option reduces. Any valuation model you use, it will have time decay value incorporated into it.

So when deciding upon whether to trade or to hold the option, it is always adivsable to trade the option. Say you have a Long Call Option Position with strike price of \$25 which you bought when there were 2 months expiry at price of \$2. A month passes by and due to price movement of the underlying which might have now come to \$36, the option price has shot upto \$15. So if you close this option position, you will get a profit of \$15 - \$2 = \$13 per option.
This current option price of \$15 contains 2 parts, \$11 from intrinsic value (Current price of underlying \$36 - Strike Price \$25). The other \$2 is the time decay value. So if you close this position now, you will get both intrinsic value (\$11) + Time decay value (\$2) making it profit of \$13. As more time will pass by and the option nears expiry, the time decay will reduce. So even if at the time of expiry, the intrinsic value of Option may remain at \$11, the time decay value will become zero. So the only profit you will have if \$11.

Moreover, by holding the option, you are also taking a risk of uncertainity till option expires. It is possible that whatever option is in profit today, might be at a loss in the next one month. The underlying today is at \$36, it might come down to \$24, making your option worthless. Hence, trade the options with pre-determined stop-loss and targets
 Posted by Shobhit See All Articles with