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 a sell to close example? ›
There are several types of “sell to close” trades in trading, including: Closing a long stock position: An investor can “sell to close” their long position in a stock by selling the shares they own at the current market price. This is a way to realize a profit on the position.
What is the difference between sell to open and sell to close put options? ›
A sell-to-open order is an options order type in which you sell (also described as write) a new options contract. In contrast, a sell-to-close order is an options order type in which you sell an options contract you already own. Both types of options, calls and puts, are subject to these order types.
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.
What happens when I buy to close a put option? ›
Types of Buy to Close Trades
Buying put options: If an investor has “bought to open” a put option position and the stock price has fallen, they can “buy to close” the position by selling the option at a higher price or exercising the option. This allows them to realize a profit on the option position.
Can I close sell put options before expiration? ›
A trader can decide to sell an option before expiry if they believe this would be more profitable. This is because options have time value, which is the portion of an option's premium attributable to the remaining time until the contract expires.
What are the three steps to close a sale? ›
Topics
- Closing sales in 7 steps (or less)
- 1Send through the costs.
- 2Ask for the sale.
- 3Address your prospect's concerns.
- 4Prepare to negotiate.
- 5Use the right sales closing technique.
- 6Follow up with your prospect.
- 7Know when to move on.
The next important thing to remember is that the selling options strategy works best when the market of the stock or the stock market has been exhibiting a clear-cut trend. For example, if there is a steady bullish trend, then traders will make profits by being consistent with selling put options.
Is it better to sell or exercise a put option? ›
There are many benefits to selling an option, such as a put, before the expiry instead of exercising it. Option premiums are in constant flux, and purchasing put options that are deep in the money or far out of the money drastically affects the option premium and the possibility of exercising it.
What happens if you don't sell your call option before expiration? ›
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.
As a put seller your maximum loss is the strike price minus the premium. To get to a point where your loss is zero (breakeven) the price of the option should not be less than the premium already received. Your maximum gain as a put seller is the premium received.
When to close an option position? ›
Buyers of an option position should be aware of time decay effects and should close the positions as a stop-loss measure if entering the last month of expiry with no clarity on a big change in valuations. Time decay can erode a lot of money, even if the underlying price moves substantially.
Can you lose more money than you put in with options? ›
Like other securities including stocks, bonds and mutual funds, options carry no guarantees. Be aware that it's possible to lose the entire principal invested, and sometimes more. As an options holder, you risk the entire amount of the premium you pay.
What is an example of a 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 a sell stop? ›
Stop order example:
The current stock price is $90. You want to protect against a significant decline. You could enter a sell-stop order at $85. If an execution occurs at $85 or lower, your stop order is triggered and a market order is entered to sell at the next available market price.
What do SL and TP mean in trading? ›
The Stop Loss (SL) and Take Profit (TP) features are basically your risk management tools. You can choose between Stop Loss, Market Stop and Trailing Stop orders when exiting a trade. When comparing Take Profit vs Stop Loss, Stop Loss is more important.
