Presume that you're losing money on your options. To keep this general, I assume nothing about the relationship between current, strike, and the contract price. How can you decide between selling now for something? Or holding until, and selling on the, expiry date?

I assume the semi-strong form of the EMH, defined in Zvi Bodie, Alex Kane, Alan J. Marcus's Investments (2018 11 edn). p 338.

      The semistrong-form hypothesis states that all publicly available information regarding the prospects of a firm must be reflected already in the stock price. Such information includes, in addition to past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earnings forecasts, and accounting practices. Again, if investors have access to such information from publicly available sources, one would expect it to be reflected in stock prices.

2 Answers 2


I have to roll my eyes when people roll out the Efficient Market Hypothesis as an explanation. @-@

When to take a loss involves evaluating a lot of objective information and then making a subjective decision. Therefore, there is no one size fits all answer and there are a multitude of answers out there (google "When to cut losses" for lots of them).

I'd suggest 3 basic ideas.

1) If your outlook for the underlying has changed, admit your mistake and cut your losses.

2) If your outlook for the underlying has changed but most of your premium is gone, consider it a lottery ticket and let it ride.

3) If there's some premium remaining, the underlying hasn't dropped a lot (you own a call), and there's more than a glimmer of hope for some recovery then adjust the trade.

A common way is to average down by buying another call. The problem with this is that it costs more money. It's possible that you're throwing more good money after bad.

A simple way to lower your break even and increase the probability of generating a profit is to do a repair. Roll the long call down into a bull call spread by placing a 1x2 ratio spread where you sell two of your current call and buy one of the next lower strike (selling two calls means that you are selling your current long call to close and selling one of the same call to open). Ideally, you want to do this for no cost. Your break even will be lower which means that you need much less of a bounce to get even.


Ideally, you should have a thesis and game plan before executing the initial trade. Why did you think it was a good trade? Given why you thought it was a good trade, how much did you reasonably expect to profit? If your thinking turns out to be wrong, how much are you willing to lose before pulling the plug?

If you aren't clear on any of the above before putting on a trade, you'd find yourself waffling around taking subsequent action. Other than reviewing a unique set of variables (greeks) with options, your decision making is just the same as buying something that's losing you money and trying to figure out whether to hold or sell.

With your money losing options, you should price multiple reasonable/expected scenarios to get an idea of how far out at sea you are i.e. if price moves x and vol moves y in z days what are these worth? Look at your option decay (theta) to evaluate how much you'd lose everyday till expiry if market conditions hold as is. Don't be caught holding options that require a 30% increase in price and doubling of implied vol for you to avoid losing everything on expiry in 2 days.

In my opinion, EMH is beautiful market theory that won't help you with this.

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