Opening a trade is one decision. Managing it is dozens: every day the stock moves, time passes and volatility shifts, and each change asks whether to hold, take the profit, cut the loss or change the position. Choosing the trade belongs to the checklist from Module 12; this lesson starts once the trade is on.
Decide the exits before you enter
Write down three things with the order: a profit target, the gain at which you close; a loss limit, the loss at which you close; and a time stop, the date you close whatever has happened. The time stop matters most for options, which change shape as expiration nears.
Profit targets for short premium
A short option earns its credit through time decay, but not at an even pace. Sell a $90 put and a $110 call on a $100 stock for $1.06, 30 days out at 30% volatility. If the stock sits still, half the credit is earned with 20 days still to go, three quarters with 15 to go, and the last quarter takes the remaining two weeks.
Short the $90 put and the $110 call for about $1.06 with 30 days left. Drag days to 20 and hover at $100: about half the credit is already earned. Drag on to 15 and three quarters is in, while the loss past either strike is as large as ever.
By then the money left to make is small, 26 cents, but the risk held is nearly all of it: a gap through either strike would wipe out the gain and more, just as it would have on the first day. That is why many premium sellers take profits at half the maximum; the target stops you holding the worst part of the trade.
Loss limits
For short premium, common loss rules are a multiple of the credit, such as twice what you collected, or the stock trading through a short strike. For long premium, it is usually a share of what you paid, or a date after which the decay still ahead makes waiting too expensive. Any rule works if it is written down first and followed.
Rolling out, up and down
Rolling means closing an option and opening a similar one in the same order. Out is the same strike in a later expiration; up or down is a higher or lower strike; the two combine, as in rolling a short call up and out. A roll out at the same strike, sent as one order, is a calendar spread: rolling a short call out buys back the near call and sells the later one, collecting the calendar's price as a credit. Rolling a long call out is the same trade reversed, and costs that price as a debit.
The later call minus the near call, both at $100, against the stock price: the credit a short call collects by rolling out 30 days. It peaks at the strike and shrinks deep in the money. Hover at $100 and at $115 on each line.
The credit is largest near the strike and shrinks as the stock moves away. Deep in the money both calls are mostly intrinsic value, so rolling a short call the stock has run through buys another month of risk for very little. That is the real cost of a roll: not the cash, but the extra time you agree to hold the position. Judge every roll as a new trade: if you would not sell the later option today with fresh money, a credit for doing so is no reason to.
Adjusting instead of closing
An adjustment changes the position without closing it. Buy wings to turn a short strangle into an iron condor and the undefined risk becomes defined. Trade shares against the position to bring its delta back to zero, the hedge from Module 6. Or close the tested side and keep the side that is working. Each adjustment pays the bid-ask spread again, as the first lesson of this module showed, so it should fix a specific risk, not just make the payoff chart look better.
Close before expiration week
In the last week, an at-the-money option's gamma climbs steeply, so a short position's delta swings with every small move. With 5 days left an at-the-money option has about two and a half times the gamma it had with 30 days left, and with 1 day left about five and a half times. Theta grows too, but the premium left is small and the risk to your delta is at its largest. Add the pin risk from earlier in this module and the case for closing short options before expiration week, or rolling them out, is strong.
Gamma of a $100 call against days to expiration, at the money and with the strike 5% above. The at-the-money line climbs steeply in the last week. Switch to theta to see the decay that tempts sellers to hold on.
The strike 5% out of the money peaks around ten days out and then fades, because with little time left the stock is unlikely to reach it. But if the stock drifts up to that strike, it becomes the at-the-money line, and its gamma is suddenly the steep one.
The maths: why gamma jumps in the last week, and what a roll is worth
For an at-the-money option, gamma is about 0.4 / (S × v × √T), with T in years and v as a decimal. Because √T sits underneath, gamma rises as expiration nears: from 30 days to 5 it multiplies by √(30 / 5) ≈ 2.45, and to 1 day by √30 ≈ 5.5. For a $100 stock at 30% volatility that is 0.4 / (100 × 0.30 × 0.287) ≈ 0.046 at 30 days and about 0.114 at 5 days.
What that does to a short option: the loss from gamma on a move dS is about ½ × Γ × dS² × 100 per contract. On a $3 move that is 0.5 × 0.046 × 9 × 100 ≈ $21 at 30 days and 0.5 × 0.114 × 9 × 100 ≈ $51 at 5 days, for the same stock and the same move.
A roll out at strike K from a near expiration T1 to a later one T2 collects C(K, T2) − C(K, T1) per share, the calendar spread's price. At the money that is roughly the extra time value, 0.4 × S × v × (√T2 − √T1); deep in or out of the money it falls toward zero. At $100 and 30% volatility, rolling from 30 days to 60 collects about 0.4 × 100 × 0.30 × (0.405 − 0.287) ≈ $1.42 a share by this shortcut; the full model, with interest, gives a little more.
Your turn
Open GOOGL on the Options Chain. Read the at-the-money gamma on the nearest expiration and again on the monthly, and compare them. Then price a roll: the at-the-money call on the monthly against the same strike one monthly further out.