The Buyback: Taking Your Option Selling Profits Early




The Buyback: Taking Your Option Selling Profits Early

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(Video Transcript)

Hi, this is Michael Gross, Director of Research at here with your bi-monthly Video Option Selling Lesson. The subject of this week’s lesson is The Buyback. Before we talk about the buyback, I don’t want to mention that if you find today’s lesson interesting or some of our other video lessons interesting, they’re all covered thoroughly in our new Third Edition of The Complete Guide to Option Selling. It’s out through McGraw Hill. You can get it at a 40% discount off cover price if you go to our website at

Today’s lesson, The Buyback, in particular what we’re going to be talking about today is taking profits on your options that are successful. You can also buyback options as a risk management strategy, that’s the subject of another lesson, in fact, it is up on our blog or video lesson page if you’d like to see that one. Today, we’re going to talk about as it relates to taking profits. A lot of people wonder when they’re selling options, “If I sell the option and it goes my way, do I have to wait all the way till expiration until I get my profits?” The answer is no, of course not. You can buy options back at any time. In fact, buying options that have decayed where there’s a lot of time left on them can be an excellent strategy. Let’s do an example. Here.

So, a recent market we talked about, if you watch our market updates and our market articles and the newsletter, etc., we talked about selling natural gas calls. Let’s just assume here’s our natural gas chart. For example, 60 days ago you sold natural gas calls. Here’s your call and there’s your strike price. This is what the market’s doing and the market has continued to go down, for example. So, here we are, 60 days later. Now, you sold an option with 120 days on it, let’s say. 60 days in, the market has done nothing but go down. Now, your option has decayed substantially at this point, okay? Let’s say it has decayed by 90%. You sold the option for $1,000, now it’s worth $100. The option still has 60 days until it expires. Now, the question for you is do you want to wait around another 60 days when all you can make is $100? Well, if it’s me, my answer is no. I don’t want to wait 60 more days, I’ve already made 90% of what I can possibly make on this trade because all I can make is the premium, $1,000, and I’ve already made $900 of that. Why stick around another 60 days and take that risk just to make $100? So, most of the time, if makes sense to buy these options back if they have decayed. Our typical guideline is if the thing has decayed by 90% and there’s more than 30 days on it you might as well buy it back. In this case, you buy the option back at $100, it cost you $100 to do it, but you make a $900 profit on the trade.

What benefits does this give to you as the option seller? One, you take 90% of your profit but, more importantly, you eliminate the risk. Again, as we mentioned, why stick around those extra 60 days just to make 10% more? That’s benefit number one, probably the biggest one. Number two, you free up valuable margin from repositioning. When you’re in the trade, it’s pulling margin. Even when the option has decayed somewhat it can still be pulling some significant margin. When you eliminate it, you free that margin up to go and do a different trade where you’re getting higher premiums, repositioning, that’s more efficient deployment of your capital, another big reason why buybacks are a good idea. The third reason, it’s more psychological in nature, you book a winning trade. Psychologically, that can be a boost to you as an individual trader. When you’re managing portfolios professionally, that’s not as big a deal, but when you’re trading at home often times emotions do come into it. Booking a winner can give you that confidence to go on and reposition in other markets. If you are managing risk on your own portfolio, the buyback and valuable strategy, it’s something we use quite a bit of when we’re managing portfolios. Obviously, if we’re managing your portfolio it’s something we’re going to be employing quite a bit.

I hope you’ve enjoyed this week’s lesson. Again, if you’d like to learn more about these type of strategies, you can now get The Complete Guide to Option Selling: Third Edition at our website at You get it at a 40% discount off the cover price. If you’d like to talk to us about account, we do offer free consultations. You can call us at 800-346-1949 to schedule your consultation. Of course, if you’re calling from overseas you can call us at 813-472-5760. Have a great month of option selling and we’ll talk to you in two weeks. I’m Michael Gross with

  1. Mr.C & Mr.G
    Thanks for opening up the world of option selling for me. { and others}. I am way below your act. requirements. Still, I am now re-reading your book {3rd edition} and look forward to your emails.
    I have begun to invest with my nickels and dimes and incorporating your ideas into my own trading I have met with some initial, albeit, modest success.
    Thank you gentlemen.

  2. Hi Michael,

    Do you (the firm) ever decide to buy back at greater than 10% premium remaining? I’ve found that it can take an extra long time for short options to go to 10% when there is a decent amount of time remaining (pretty much anything nearing 2 months or more).

    They may get to 20% premium remaining, but it seems that that remaining 10% (to get to 10% left) is almost as hard to shed as those last 5 pounds when dieting!

    If you do buy back early with > 10% left, how much further out (premium-wise) do you buy back? How rare is this, or do you generally find it is still worth it to wait for that last 10%?

    If I’ve sold an option for $500, I’m sitting on a lot of them just to wait for another $50 of decay to buy it back at $50. So, I can claim 80% and re-position, or wait around for what feels like an extended amount of time for that last $50…

    I suppose one could say that about every incremental 1% and you have to draw the line somewhere, but it’s hard to determine the best place for that line (for me)!

    • Michael Gross Says:
      February 21, 2018 at 2:20 pm

      Dear Chris,

      Its not a hard and fast rule. But as a general rule, yes, we stick to the 90% rule. There are times when we feel the fundamentals may be shifting – or we want to scale down the position to reduce risk, that yes, we will buy back sooner.

      However, over the years, we’ve found the 90% buyback level to be a solid rule of thumb.


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