Option Cancelling

Purchases and sales of options cannot be canceled once they are transacted. You cannot simply stop the trade once you’ve bought or sold an option, you are bound by contract to meet obligations at expiration. Option cancelling works differently than normal. The consequences of your options positions are canceled by acquiring a perfectly offsetting position, neutralizing your exposure.

If you purchased a call or a put at a specific exercise date and price, write a call or put which has the same exercise price and date on the same underlying. If you wrote a call or a put at a specific exercise date and price, purchase a call or put which has the same exercise price and date on the same asset. This strategy is slightly imperfect, since you may not pay (or receive) the same premium for the opposing position as you did on your initial position. You can suffer a premium loss or a profit from premium imbalances. This strategy will generally cancel out your position.

Strategic Vulnerabilities

This is an imperfect strategy if you’re using options which can be exercised before their expiration, as you may get assigned earlier than expected. If your opposing position is still at or in the money, you can exercise your cancelling position. If the price falls out of the money between your assignment and your attempt to exercise, you will not be able to exercise your option to cancel your exposure.

You may be forced to acquire the asset instead of simply having cash withdrawn from your account with the brokerage. You will need to know if your position exposure can be settled via cash or if owning the underlying asset is absolutely required. If you must transfer the underlying asset you will need to purchase it on the open market, which may be more expensive than anticipated.