The 50% Rule: When to Close an Options Trade Early

The 50% rule says to close an option you sold once it has lost half its value — buying it back for half the premium you collected, rather than holding to expiry for the last bit. Experienced sellers do this routinely, often with days or weeks left on the clock, because banking the profit early and redeploying the capital usually beats squeezing out the rest. Most beginners, by contrast, treat expiry as the natural end of a trade — and leave that edge on the table.

What the 50% rule is#

Put concretely: track the premium on the option you sold, and when you can buy it back for half of what you collected, close the position.

If you sold a cash-secured put for $2.00, the rule says to close when you can buy it back for $1.00. You keep $1.00 of the $2.00 you collected — 50% of your maximum gain — and you free up the reserved capital for the next trade.

The rule works the same way for covered calls: if you sold a call for $1.50, close at $0.75.

You are not holding until every last cent of premium decays. You are taking a defined, locked-in win and moving on.

The math behind closing early#

Here is the argument that makes the 50% rule rational rather than arbitrary.

Suppose you sell a 45-day put for $2.00. After 20 days, the stock is holding above your strike and the put is now worth $1.00. You have two choices:

• Hold for the remaining 25 days to collect the final $1.00 of premium.
• Close now, book the $1.00 gain, and sell another put in a new 45-day cycle.

If you close and redeploy immediately, you can sell a new $2.00 premium put — and then close that one at 50% as well. In the time it took to earn the full $2.00 on one trade, you could have completed a full second trade and collected another $1.00, bringing your total to $2.00 from two partial trades. On an annualized basis the returns are comparable or better, because you kept the capital working.

The key insight: the last portion of premium is the hardest to collect. An option that has decayed from $2.00 to $1.00 has already surrendered most of its time value. The remaining $1.00 takes the full remaining time to decay — but it comes with 25 more days of risk that the stock reverses and turns your winner into a loser. You are holding on for a diminishing reward while the risk clock keeps running.

How does closing early affect annualized return?#

The most persuasive version of the argument is about annualized return, not raw premium.

A 45-day trade that earns $2.00 on $9,000 of reserved capital (a $90 strike) has a return per trade of 2.2%. Annualized — running the full 45-day cycle — that is roughly 18% per year.

A 45-day trade where you close at the 50% point (after roughly 20 days) and immediately restart earns $1.00 per cycle, but cycles of 20 days are far more frequent. $1.00 on $9,000 per 20 days, annualized, is about 20% per year. Slightly better — and achieved with meaningfully less risk per trade, because you exit before the last 25 days of each expiry cycle.

The improvement is not dramatic, but it compounds. More importantly, earlier exits reduce the number of days each trade spends near expiry, where gamma risk (the rate at which the option’s value can swing with stock price) is highest.

Should you close at 21 days to expiry?#

Many options sellers pair the 50% rule with a time-based companion: close any trade that reaches 21 days to expiry (DTE), regardless of whether you have hit 50% of max profit. The logic is similar — the last three weeks before expiry are where gamma and pin risk accelerate. If the stock makes a sudden move in those final days, a near-worthless option can snap back quickly.

The combined rule: close at 50% of max profit OR at 21 DTE, whichever comes first.

In practice, winners often hit 50% in the early and middle portions of the cycle, so the 21 DTE rule mostly catches trades where the stock has drifted toward your strike and the option has not decayed as fast as expected.

When should you hold past 50%?#

The 50% rule is a default, not a command. There are situations where holding past it is rational.

IV has spiked against you. If a market-wide fear spike pushed up IV while the stock held, your put may have gone from $1.00 to $1.80 despite the stock not moving much. In that case, closing now costs more than 50% of your original premium — the rule is less relevant. Wait for the spike to subside.

You are close to expiry and the remaining premium is trivial. If the put is worth $0.20 with 4 days to go and you sold it for $2.00, closing for $0.20 may not be worth the commission and friction. At that level, many traders let it expire.

The stock is far above your strike and IV is low. A put that is deep out of the money and nearly worthless is already a very low-risk position. The argument for an early close is weakest when the option is already almost at zero.

How does the 50% rule apply to the wheel?#

For traders running the wheel — alternating between selling puts and covered calls on the same position — the 50% rule determines the natural rhythm of the strategy.

• When running puts: close at 50% of the put’s premium, then sell a new put in the next cycle.
• When running covered calls after assignment: close at 50% of the call’s premium, then sell a new call.
• At 21 DTE: close regardless of where you are in the decay, to avoid the final-week gamma zone.

This keeps the wheel turning at a steady, predictable pace rather than waiting for every contract to expire. The cost is slightly lower maximum premium per cycle; the benefit is lower tail risk and capital freed up faster.

What doesn’t the 50% rule fix?#

The 50% rule manages profitable trades. It does not manage losing ones. A put that has moved against you — the stock has fallen toward or through your strike — does not have a simple rule like this. That situation requires a different decision: accept assignment, roll the position, or close at a loss. The 50% rule applies only to winners; do not confuse it with a universal position-management framework. That framework - how to triage and defend any tested position - is laid out in What to Do When an Options Trade Goes Against You.

Use the calculators below to model your trades before and after the 50% close — the premium, the capital committed, and the annualized return across different early-exit scenarios.