Exiting an Option Position
Jim Graham

Exiting an Option Position

When you open an option position you have two choices: Buy it or Sell it.  The actual orders used would be “buy to open" or “sell to open".  Once you are long or short an option there are a number of things you can do to close the position: 1) Close it with an offsetting trade 2) Let it expire worthless on expiration day or, 3) If you are long an option you can exercise it.  If you are short an option you may experience the other side of exercise—being assigned.  Let’s look at each of these choices in detail.

Before we begin it is important to note that most stock options traded on all the US exchanges are American-style options.  They differ from European-style options in that they can be exercised at any time up until expiration.  By contrast, European-style options can be exercised only on the day they expire (although they can still be bought and sold at any time prior to that).

Offsetting the Option

Offsetting is the primary way that most traders close a position.  Offsetting is simply a method of reversing your original transaction to exit the trade.  You can always sell an option that you previously bought, or buy an option that you previously sold, at any time before the end of the last trading day.  The last trading day is usually the first business day prior to the option’s expiration date (the third Friday of the month for stock options).

If you own (bought) a call, you have to “sell to close" exactly the same call (with the same strike price and expiration) to close your position.  If you are short (sold) a call, you have to “buy to close" that same exact call to close your position.  If you own a put, you have to “sell to close" exactly the same put.  And if you sold a put, you have to “buy to close" the put with the same strike price and expiration.

If you do not offset your position, then you have not officially exited the trade.  If you are a long a call and you sell another call (with a different strike price or expiration month) you may have reduced your risk, but you have not closed your position.  Instead, you would now have two positions (although you may think of it as a single combinational position).  Doing an offsetting transaction is usually the best way to close out a position if there is still time remaining before expiration.

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