How to Close Options - Understanding Buy To Close / Sell to Close

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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.

What Is Buy To Close?
'Buy to close' refers to terminology that traders, primarily option traders, use to exit an existing short position. In market parlance, it is understood to mean that the trader wants to close out an existing option trade. Technically speaking, it means that the trader wants to buy an asset to offset, or close, a short position in that same asset.

Understanding Buy To Close
There is a nuanced difference between a 'buy to close' option and a buy to cover purchase. The former refers to mainly options, and sometimes futures, while the latter typically refers to stocks only. The end result is the same in both cases. Essentially, it is the buying back of an asset initially sold short. The net result is no exposure to the asset.

The term 'buy to close' is used when a trader is net short an option position and wants to exit that open position. In other words, they already have an open position, by way of writing an option, for which they have received a net credit, and now seek to close that position. Traders normally use a 'sell to open' order to establish this open short option position which the 'buy to close' order offsets.

In the case of stocks, selling assets short involves borrowing the asset from another entity. For futures and options, the process involves writing a contract to sell it to another buyer. In both cases, the trader hopes the price of the underlying stock moves lower to generate a profit at the trade's closing.

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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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