What Is Sell to Close?
Sell to close indicates that an options order is being placed to exit a trade. The trader already owns the options contract and by selling the contract will close the position.
Sell to close is employed to close a long position originally established with a buy to open order and can be compared with buy to close and sell to open orders. It is also used, but less often, in equity and fixed-income trading to indicate a sale that closes an existing long position.
Key Takeaways
- Sell to close specifies that a sale is being used to close out an existing long position, and is often used in the context of derivatives trading.
- Traders normally use a sell to close order to exit an open long position, which a 'buy to open' order establishes.
- If an option is out of the money and will expire worthless, a trader may still choose to sell to close to clear the position.
Understanding Sell to Close
Sell to close refers to the action of closing out the position by selling the contract. In options trading, both short and long positions are taken through contracts that are purchased. Once a contract is owned by a trader, it can only be dealt with in three ways:
- The option is out of the money (OTM) and expires worthless;
- The option is in the money (ITM) and can be exercised to trade for the underlying or settle for the difference; or
- The option can be sold to close the position. A sell to close order may be made with the option ITM, OTM, or even at the money (ATM).
Traders will typically sell to close call options contracts they own when they no longer want to hold a long bullish position on the underlying asset. They sell to closeput options contracts they own when they no longer want to hold a long bearish position on the underlying asset.
Example of Selling to Close
Let's assume a trader is long an exchange-traded option using a buy to open order on a call option on Company A. Imagine that, at the time, the stock was priced at $175.00. Let's also assume that the $170.00 strike call, with an expiration date 90 days away, was selling for $7.50 per share. This gives the option $5.00 of intrinsic value ($175.00 stock price – $170.00 strike price = $5.00 intrinsic value) and $2.50 of extrinsic value ($7.50 option premium – $5.00 intrinsic value = $2.50 extrinsic value).
As time goes by and the value of Company Afluctuates up and down, the value of the call option is going to fluctuate as well. The higher the value of the call option goes, the more profitable it will become. Conversely, the lower the value of the call option goes, the less profitable it will become. However, those profits, or losses, will only be realized once the trader exits the position using a sell to close order.
There are three possible outcomes when a trader sells to close a long option.
Example: Sell to Close for a Profit
If the price of the underlying asset increases more than enough to offset the time decay the option will experience (the closer it gets to expiration) then the value of the call option will also increase. In this case, a trader can sell to close the long call option for a profit.
Let's assume in this scenario that Company A rises from $175.00 to $180.00 by expiration, increasing the value of the call option from $7.50 to $10.00. This option is now comprised of $10.00 of intrinsic value ($180.00 stock price – $170.00 strike price = $10.00 intrinsic value) and $0.00 of extrinsic value (options have no extrinsic value at expiration). The trader can now sell to close the long call option position for a profit of $2.50 ($10.00 current value – $7.50 purchase price = $2.50 profit).
Example: Sell to Close at Break-Even
If the price of the underlying asset increases only enough to offset the time decay the option will experience then the value of the call option will remain unchanged. In this case, a trader can sell to close the long call option at break-even.
Let's assume in this scenario that Company A rises from $175.00 to $177.50 by expiration, keeping the value of the call option at $7.50. This value is comprised of $7.50 of intrinsic value ($177.50 stock price – $170.00 strike price = $7.50 intrinsic value) and $0.00 of extrinsic value. The trader can now sell to close the long call option position at break-even ($7.50 current value – $7.50 purchase price = $0.00 profit).
Example: Sell to Close for a Loss
If the price of the underlying asset does not increase enough to offset the time decay the option will experience, then the value of the call option will decline. In this case, a trader can sell to close the long call option at a loss.
Let's assume in this scenario that Company A only rises from $175.00 to $176.00 by expiration, dropping the value of the call option to $6.00. This value is comprised of $6.00 of intrinsic value ($176.00 stock price – $170.00 strike price = $6.00 intrinsic value) and $0.00 of extrinsic value. The trader can now only sell to close the long call option position at a loss of $1.50 ($6.00 current value – $7.50 purchase price = $1.50 loss).
FAQs
Sell to close means selling an option previously bought to open the transaction. This closes the position. Sell to close can result in a profit, but can also leave the trader with no gain or even a loss, depending on the value of the position when they sell compared to the value when they purchased it.
What is an example of sell to close? ›
At a Loss
The decline in time value is more than the increase in intrinsic value. You choose to sell-to-close your long call position for $2, resulting in a loss of $3 on the trade. You purchased the call for $5 and closed out the transaction for $2, $5 – $3 = $2 loss.
How to close option sell position? ›
Exit the option position by letting it expire:
If the underlying currency rate is below the strike price, then the option expires worthless and no currency position is established. Put: If the underlying currency rate is below the strike price, your account will automatically sell the currency at the strike price.
How does option selling work with example? ›
Sellers of put options anticipate bullish market conditions. For example, suppose you're confident that a particular tech stock will continue to rise in value. By selling put options, you receive upfront premiums while committing to buy the stock at a predetermined price if the market dips.
Is sell to close the same as exercising an option? ›
Sell to close refers to closing out a long position in an options contract. There are three outcomes with a long options contract: (1) it expires worthless, (2) it is exercised, and (3) it is sold. The majority of option holders choose to sell a long options contract rather than exercise it.
When should you sell to close an option? ›
Once the option has gained value to the target price, the trade is profitable. However, if the option is losing money and it seems that it will continue to do so, it may be a good idea to sell to close to mitigate losses. It's important to understand the market and avoid any panic-selling, however.
What is an example of selling a call option? ›
Example of Selling Call Options
For instance, there is a stock ABC trading at 1,000 per share. You could sell a call on that stock with a 1,000 strike price for 200 with expiration in eight months. One contract would give you 20,000 (this is 200*1 contract*100 shares).
Can you be assigned if you sell to close? ›
Anyone short that particular option is at risk of assignment when an option holder decides to exercise. Third, assuming the other side of your trade was an opening purchase, they may sell to close at any time but since you are still short, you are at risk of assignment.
What happens when I sell an option? ›
Selling a call option
Call sellers generally expect the price of the underlying stock to remain flat or move lower. If the stock trades above the strike price, the option is considered to be in the money and will be exercised. The call seller will have to deliver the stock at the strike, receiving cash for the sale.
How do you win an option selling? ›
Bearish Option Trading Strategies
A bear call spread is an options trading strategy that involves selling a call option at a lower strike price while simultaneously buying a call option at a higher strike price. The strategy is designed to take advantage of a bearish market outlook while limiting potential losses.
Buying options involves the risk of losing the initial premium but offers the potential for unlimited gains. Selling options can generate immediate income but exposes the seller to potentially unlimited losses. If sellers also buy other options to make spreads, it will limit both their upside and their downside.
How do options work with example? ›
Example of an Option. Suppose that Microsoft (MFST) shares trade at $108 per share and you believe they will increase in value. You decide to buy a call option to benefit from an increase in the stock's price. You purchase one call option with a strike price of $115 for one month in the future for 37 cents per contract ...
Can I sell options without buying? ›
A naked call option is when an option seller sells a call option without owning the underlying stock. Naked short selling of options is considered very risky since there is no limit to how high a stock's price can go and the option seller is not “covered” against potential losses by owning the underlying stock.
How do I close a sell-put option? ›
Selling put options: If an investor has “sold to open” a put option position and the stock price has not fallen below the option's strike price, they can “sell to close” the position by buying back the option at a lower price or letting it expire worthless.
Is it better to sell or exercise an option? ›
As it turns out, there are good reasons not to exercise your rights as an option owner. Instead, closing the option (selling it through an offsetting transaction) is often the best choice for an option owner who no longer wants to hold the position.
What is an example of a sell to open option? ›
Suppose trader XYZ thinks that stock ABC's price will go down in the coming weeks. Then XYZ opens a Sell to Open position on ABC's call options. This means that the trader is speculating on a downward move for ABC's price and selling its call options to the market maker, who has bet that ABC's price will go up.
What is an example of sell to open? ›
Suppose trader XYZ thinks that stock ABC's price will go down in the coming weeks. Then XYZ opens a Sell to Open position on ABC's call options. This means that the trader is speculating on a downward move for ABC's price and selling its call options to the market maker, who has bet that ABC's price will go up.
What is an example of a market on close? ›
Market-On-Close Order Examples
A trader wants to sell 500 shares of ABC stock and wants to lock in the closing price for the day. They could place an MOC sell order with their broker before the market close. The broker will then execute the order as a market order at or near the closing price.
What is an example of closing in sales process? ›
Now-or-never (urgency) close
The idea is to use a limited-time offer to create a sense of urgency. Example: You have every right to think about this great offer – take all the time you need. Please remember, however, that it ends tomorrow and if you wait and call at the end of the week, you will miss out.
What is the difference between sell to open and sell to close? ›
Sell to Close vs.
“Sell to close” involves closing out an existing long position by selling an asset the investor already owns, while “sell to open” involves opening a new short position by selling an asset the investor does not currently own.
