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Is there a rule of thumb on when to exit to use to close (sell) an option if the stock is not going in the right direction? For example, a call option contract is made on a stock which expires in a month, but the price dropped after a week to 25%. Should you wait for the option to expire or close it immediately to stop further loss?

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    If anyone knew the answer to your question of when to best exit, they'd be rich. The future is unknown. You have to keep in mind that the option is a wasting asset whose decay rate is increasing every day as it rolls toward expiration. Figure out how much you're willing to lose and get out if you get there. Dec 25, 2019 at 3:12
  • If you need to ask this question, then you are probably aren't ready for Options. Someone once told me: expect to lose $100k before you start to fully understand and make money with Options. I am sure that not everyone suffers through this, but it is a good warning for the newcomer. This is not for the faint of heart.
    – Mattman944
    Dec 25, 2019 at 17:58
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    @Mattman944 - For only $1,999, I can show you how to lose far less than $100k when you begin trading options :->) . Seriously, losing $100k as option trading tuition is rather hyperbolic. There are a number of conservative ways to utilize options, some reducing risk. Dec 27, 2019 at 1:58
  • @Mattman944 I think a person with a low capital like $1000 (not $100K) can buy and sell options and make a profit. That is less risky than investing $100K in the underlying stock and lose all the money. But, after reading all the answers for my own questions here, option trading is complex due to a lot of mathematical calculations based on the time go into the price. It is active which means you can't leave like an investment and wait for it to go up. Dec 27, 2019 at 13:41
  • @Mattman944 I met a TV cable service man who told me that he buys and sells options for $500 and make a small profit. I met another college student who pays his college fees by buying and selling options. They have a very low capital. Dec 27, 2019 at 13:46

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Let's say you buy a stock and it soon drops 25%. Is it best to sell it to stop further losses, or will it go back up? Just like in your scenario, there is no magic strategy that is always correct, as the market is unpredictable.

However, with options, you also need to worry about time until expiration. So, since you still have approx 3/4 of the original time left, if you believe the stock could still rally, maybe you could hold out a bit longer. Or, you might think it will keep going lower or stay the same, in which case you probably want to get rid of it. But that is really just speculation and you'll never know for sure.

When buying options, you are most likely already at a disadvantage when it comes to probability of success. The further the underlying goes in the wrong direction, the further your probability of success decreases. Look at the odds, and make the call whether or not the current risk is worth the reward. Nobody else can tell you what is appropriate for your exact situation.

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