What is Buy to Close in Trading? | TrendSpider Learning Center (2024)

FAQs

What is Buy to Close in Trading? | TrendSpider Learning Center? ›

“Buy to close” is a trading strategy in which an investor buys back a financial instrument, such as a stock, bond, or options contract, to close out an existing short position in the market.

Buy to Close: Investment Guide. Buying to open is when you purchase a new options contract and assume either a long or short position. Conversely, buying to close is when you purchase an existing options contract that matches a contract you sold. In doing so you offset your existing contract and exit your position.

If a new options investor wants to buy a call or put, that investor should buy to open. A buy-to-open order indicates to market participants that the trader is establishing a new position rather than closing out an existing position. The sell to close order is used to exit a position taken with a buy-to-open order.

If you bought-to-open an option, you can sell-to-close so long as there is a willing buyer. You might also consider allowing the option to expire if it will finish out of the money. A final possibility is to exercise the right to buy or sell the underlying shares.

Key Takeaways

Closing a position refers to canceling out an existing position in the market by taking the opposite position. In a short sale, this would mean buying back the security, while a long position entails selling the security.

Example of a put option

By purchasing a put option for $5, you can sell 100 shares at $100 per share. If the ABC company's stock drops to $80, you could exercise the option and sell 100 shares at $100 per share, resulting in a total profit of $1,500.

A Market-on-Close (MOC) order is a market order that is submitted to execute as close to the closing price as possible.

Key Takeaways. An option is a contract giving the buyer the right—but not the obligation—to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date. People use options for income, to speculate, and to hedge risk.

The evidence suggests that buying on open has a slight edge than buying on close. I tested across various strategies in both the Australian and US markets and whilst the edge flipped between the two, it was only ever marginal one way or other. However, there are two other reasons why I tend to use the open.

Similar to trading equities, you must maintain a balance of $25k in your brokerage account in order to play more than three options day trades in a five-day period. Otherwise, you will be flagged as though you were buying or selling the same day with simple equities purchases.

What is the difference between buy close and sell close? ›

All actions of closing the short positions get termed as buy-to-close covered calls. All actions of closing the long option trades get called sell to close. It provides an end to all obligations related to the options contract. In addition, it provides an end to all rights related to options contracts.

If an investor buys a stock option, they can sell it for the market price up to expiration. This would close the option transaction, so the broker or the online software instruction would be “sell to close.” An investor can also exercise the option, meaning they buy or sell the stock for the option's strike price.

A call option buyer makes money if the price of the security remains above the strike price of the option. This gives the call option buyer the right to buy shares at a price lower than the market price.

Closing a short stock position: An investor can “buy to close”, or cover, their short position in a stock by purchasing the shares they borrowed from the broker at the current market price. This is a way to realize a profit on the position if the stock price has declined since they opened the short position.

WHEN TO CLOSE A LONG CALL OPTION. Buyers of long calls can sell them at any time before expiration for a profit or loss, but ideally the trade is closed for a profit when the value of the call exceeds the entry price for purchasing it.

Exercising your options

For example, if you bought to open call options, you would exercise the same call options by contacting your brokerage company and giving your instructions to exercise the call options (to buy the underlying stock at the strike price).

As an option approaches expiry, the contract holder must decide whether to sell, exercise, or let it expire. Options can be in or out of the money. When an option is in the money, it can be exercised or sold. An out-of-the-money option or an at-the-money option will expire worthless.

Suppose, for example, that the stock price rose above the strike price of the covered call. If you do not want to sell the stock, you now have greater risk of assignment, because your covered call is now in the money. You therefore might want to buy back that covered call to close out the obligation to sell the stock.

Q. What will happen if an option holder does not exercise their right to sell before its expiration? If the option's strike price has not been reached by its expiration date, your brokerage will automatically close the deal and remove the option from your list of open positions.

Exiting trades early won't require a lot of effort, but it will improve your option trading a lot. I advise to close out positions at 50% of the maximum profit. If you want you still can go higher, but many studies have shown that 50% of the max gain is a very ideal point to exit.