Every credit spread you open has to end somehow: closed early, held to expiry, or in rarer cases, assigned or exercised (covered in an earlier lesson, assignment and exercise). Between the first two, there's a genuine tradeoff, and it's one you'll face on nearly every trade you place.
As covered in an earlier lesson on time decay, theta doesn't erode a credit spread's value at a steady pace. Most of the total decay happens in the final days or week before expiry, as the option's remaining time value collapses toward zero. That's exactly when the reward for staying in the trade is smallest, and, as it turns out, exactly when the risk is largest too.
Why the final stretch feels different
An option's gamma, the rate at which its delta changes as the underlying moves, is highest when the option is near the money and close to expiry. That's a concept worth revisiting from earlier in the curriculum. In practical terms, it means a position that felt stable a week earlier can swing in value far more sharply in its last few days, on a move in the underlying that wouldn't have mattered much before. Less time to react compounds the problem: there are fewer sessions left for a position to recover if it goes against you.
The case for closing early
Many traders close a spread once they've captured a large share of the maximum possible profit, commonly somewhere in the 50-75% range of the credit received. The logic is straightforward: once most of the available reward is already banked, holding on for the last sliver of it means accepting the sharpest, fastest gamma risk of the trade's life for a shrinking payoff. Closing early trades some upside for a cleaner, more predictable outcome.
The case for holding to expiry
Holding all the way to expiry captures the full credit, and for a position that's comfortably away from the money, the extra risk of those last few days may be small in practice. Commissions and the time spent managing a position are real costs too, and some traders would rather let time decay finish the job than pay to exit early on a trade that still looks fine. Neither approach is right in every case, it depends on the position, how close it is to the strikes, and your own tolerance for that last stretch of risk.
What this doesn't mean
- It doesn't mean closing early is always the better choice. Plenty of positions are held to expiry without incident, especially ones with a comfortable buffer to the strikes.
- It doesn't mean a fixed percentage, like 50%, is a rule that applies to every trade. It's a common starting point, not a law.
- It doesn't mean gamma risk only exists in the final week. It's simply more concentrated there, not exclusive to it.