Can you sell a call option before the expiration date? What does it mean?

When you sell a call option, you're giving the buyer the right but not the obligation to purchase your stock at a set strike price within a specific time frame. This strategy hinges on three key elements: the buyer’s right to exercise, the strike price, and the time remaining until expiration.

Sometimes, it may make sense to close the position early before expiration—especially if the market shifts or your profit target is met sooner than expected. Deciding when to close requires weighing current market trends against your original trading objectives.

Covered vs. Naked Calls When Selling Early

Closing call options positions early can apply to both covered and naked calls, but with varying degrees of risk:

• Covered Calls: Buying to close your position early allows you to secure profits if the option premium declines (meaning you can repurchase the option cheaper than what you sold it for initially). It can also limit potential losses if the underlying stock moves against your initial expectations. Your decision primarily depends on whether you want to keep holding the underlying shares or change your strategy based on market movements.

• Naked Calls: Buying to close your naked call position early is critical risk management if the stock price begins to rise sharply. Acting quickly helps prevent potentially unlimited losses, which can escalate significantly if the stock price surpasses your strike price substantially.

The cost to close the position depends on the current market value of the option. If the option’s value has decreased since you sold it, you’ll secure a profit by buying it back at a lower price.

Example: Closing a Covered Call Before Expiration

Closing a covered call early can be a proactive way to manage risk and respond to changing market dynamics. Now let’s start by imagining that you own 100 shares of ABC at $50 each. You sell a call option with a $55 strike price for a $2 per share premium, collecting $200 premium:

• If ABC’s stock price falls significantly, the value of the call option may decline, allowing you to buy it back at a lower cost and realize a profit from the difference between the initial sale and repurchase price. You still retain ownership of the stock, giving you flexibility to adjust your strategy or sell another call option.

• If the stock rises rapidly toward or beyond your strike price, buying back the option early can help you avoid having your shares called away, particularly if you're not ready to sell. However, this may involve closing the position at a loss, depending on how much the option's value has increased since you sold it.

If you’re not prepared to part with your shares, covered calls may not align with your current investment approach. Consider exploring other options strategies that offer more flexibility while supporting your long-term goals. 

Pros and Cons of Closing Your Position Early

Pros:

• Secure profits sooner if the option’s value decreases.

• Quickly limit potential losses if the market moves against you.

• Gain flexibility and responsiveness to market dynamics.

Cons:

• Potentially miss out on further profits if conditions remain favorable.

• Frequent trading can incur higher transaction costs.

Managing Calls - Early Closure and Rolling 

When starting with options trading, many traders prefer covered calls on familiar stocks to observe how option prices react to underlying movements. Early position closure can sometimes offer benefits, such as limiting assignment risk, capturing partial profits amid market shifts, or freeing up capital for other opportunities. 

Rolling—closing an existing call and opening a new one with a different strike or expiration can also help extend income potential or adjust risk exposure. Regularly reviewing positions based on changing market conditions can lead to improved trading results.

Final Thoughts

Closing call options before expiration provides investors enhanced control over their positions, allowing for proactive risk management. Whether locking in profits or cutting potential losses, understanding the mechanics of early closure, alongside careful stock selection and market awareness, is essential. Building foundational knowledge in traditional investing first can significantly strengthen your capabilities and confidence when employing this strategic approach to options trading.