Three ways to exit and option trade

To exit an option position, you can either Offset the position, Exercise the position, or let the position Expire Worthless.

To exit an option position by offset, you place an order that cancels out your current open position. If your position is a long call, to offset/exit the position you would sell the same call again. If your current position is a short call, you would buy that call back again. If your current position is a long put, you would sell that same put. If your current position is a short put, you would buy that put back again. You are offsetting your current trade.
Offsetting is a popular, and easy way to close an option position easily when exiting a bad trade, or taking profits. You can offset your position at any time you like. Closing an option position via this method has two commission costs, one from opening the position originally, and the second from offsetting it. Once the position has been offset and exited, you are left with a clean plate as no exercising, or assignment is involved.

To exit an option position by exercising, you need to be an option buyer. As an option buyer, you have the right to take up on your option contracts’ terms, close the option position, and buy/sell the underlying. For example, you may own a long call position. You have the right at any time to purchase XYZ at a particular price, by a certain date. To close the option position, you can contact your broker and inform them that you would like to exercise your option and purchase XYZ at the specified price. The broker lets the Options Clearing Corporation (in the US) know that you have exercised your option, and they in turn assign a seller of that same option contract to sell you XYZ at the pre-determined price. Your option contract is now closed, and you are long XYZ stock. So in contrast to offsetting a position, if you exercise your position you will end up with no option position, but you will be left with short/long stock and will need to be able to cover those costs. Exiting an option position by this method can also sometimes require more commission costs, depending on the broker, than that of offsetting your position. Exercising a position to exit it is a good path to take when you wish to actually end up owning/selling the underlying, to counter a position in stock you already have, when liquidity may be poor in the options or when your option is deep in the money (and you might lose a lot on the bid/ask, or poor premiums).

Letting the option expire is the easiest way to close an option position if the option has no real value being out-of-the-money. For option sellers it is the best way to realize maximum profits without needing to pay a closing commission cost. For option buyers, it is the least expensive way to close a position if the buyer has crossed the trade off as a complete loss, as there is no closing commission required. But generally option buyers will salvage what they can before the option is completely worthless by offsetting their position. If the option is in the money when you let it expire, for option sellers this may mean you are assigned the option and will make a loss with the addition of added commission costs. For option buyers, to preserve any value/profit the option may have, the broker will automatically exercise the option for you.