Previously in this column, while discussing the risks associated with naked short options, we mentioned that 85 per cent of the out-of-the-money (OTM) long positions expire worthless. This week, in relation to this observation, we discuss the reasons why closing your long positions well before expiry is optimal. 

Theta factor

Options are wasting assets; they lose value with each passing day as the strikes have finite life. This loss in time value is referred to as time decay and is captured by an option’s theta. Time decay is not the same every day but accelerates as the option approaches expiry. This is because time value of the option must become zero at expiry. So, the longer you hold an option, the more you will lose value because of the theta factor. This is a good reason to close the position before expiry. If the strike you close before expiry is OTM, then it could be that you are closing to cut losses. You may argue that it may be worthwhile to hold the position till expiry. After all, given its asymmetric payoff, options can become in-the-money (ITM) if there is a sharp jump in the underlying price. That is the risk you must take if you strongly believe that such price jumps can happen.

Note that you must pay securities transaction tax (STT) if you close your long option position. Also, discount brokers typically charge a flat brokerage fee per transaction. That explains why traders typically let their long positions expire without closing it on expiry day; transaction cost can sometimes be greater than the premium you receive for closing your long position on expiry day.

What if the call option you hold is ITM? Should you carry it till expiry? Note that jump in volatility hurts ITM calls, as an ITM call can become OTM when volatility increases. That said, the primary motivation in closing your position before expiry is the levy of delivery margins by brokers starting four days before expiry (Wednesday preceding the Tuesday expiry). This is because ITM calls require you to take delivery at expiry. So, brokers must collect delivery margins starting from Wednesday’s close, typically increasing to 100 per cent of the delivery margin on expiry day. So, holding ITM calls on stocks require large trading capital. It is, therefore, optimal to close the position before expiry. 

Optional Reading

You can avoid paying delivery margins if you only trade index options, as they are cash-settled. For equity options, you could avoid delivery margins by closing your long ITM call positions before end of Wednesday preceding the Tuesday expiry. For OTM calls, you must consider closing the position if the underlying does not move as expected — that means not just the direction, but the speed at which the underlying moves after you initiate the position. Finally, note that long vertical and horizontal call spreads reduce, not eliminate, theta factor and delivery risk. 

(The author offers training programmes for individuals to manage their personal investments)

Published on October 24, 2026