What is sell to close

But the buyer and seller of options are seeking to profit in very different ways. A call option gives the buyer, or holder, the right to buy the underlying asset—such as a stock, currency, or commodity futures contract —at a predetermined price before the option expires. As the name "option" implies, the holder has the right to buy the asset at the agreed price—called the strike price —but not the obligation.

Every option is essentially a contract, or bet, between two parties. In the case of call options, the buyer is betting that the price of the underlying asset will be higher on the open market than the strike price—and that it will exceed the strike price before the option expires. If so, the option buyer can buy that asset from the option seller at the strike price and then resell it for a profit.

The buyer of a call option must pay an upfront fee for the right to make that deal. The fee, called a premium, is paid at the outset to the seller, who is betting the asset's market price won't be higher than the price specified in the option. In most basic options, that premium is the profit the seller seeks. It is also the risk exposure, or maximum loss, of the option buyer. The premium is based on a percentage of the size of the possible trade.

A put option , on the other hand, gives the buyer the right to sell an underlying asset at a specified price on or before a certain date. In this case, the buyer of the put option is essentially shorting the underlying asset, betting that it's market price will fall below the strike price in the option. If so, they can buy the asset at the lower market price and then sell it to the option seller, who is obligated to buy it at the higher, agreed strike price.

Again, the put seller, or writer, is taking the other side of the trade, betting the market price won't fall below the price specified in the option. In practice, most options traders tend not to exercise their options and instead try to make their returns through the buying and selling of options contracts. There are a number of different options trading strategies that can be used, but the most basic strategy is to simply make a profit by buying options contract and then selling them when they go up in value.

When you buy stocks you are relying on them going up in value in order to make a profit by selling them; you can also receive dividends on stocks to make a profit. One of the big advantages of options trading is that you can also buy options contracts that make you money when the relevant stock goes down in value. This is because there are two main types of options contracts that you can buy, call options and put options. Call options increase in value when the price of the underlying stock goes up, whereas put options increase in value when the price of the underlying stock goes down.

Of course, the underlying security in options contracts can also be other financial instruments other than stock. As mentioned above, it's possible to make money through buying options contracts and then exercising your option under the right circumstances. However, it really is somewhat easier to buy options contracts and simply sell them if they go up in valuenwhich is where the sell to close order is used. If you own call options on a particular stock, then you have the right to purchase that stock at an agreed strike price.

When you write an option, you give the buyer of the option the right, but not the obligation, to buy the underlying security from you at an agreed-upon price called the strike price. If the holder of the option chooses to exercise their right, you will be obligated to sell them the security at the strike price, regardless of what the actual price of the security is. With this type of contract, there are different approaches to managing the trade depending on whether it is a call or put.

If using a Sell To Open call option, you are aiming for the price of the underlying security to go down. The first involves simply buying back the contract — since the underlying asset has fallen in value, so too will the value of the call option you wrote. If you are instead using a Sell To Open put option, you are aiming for the price of the underlying security to go up.

If it does, the value of the contract will go down and you can buy it back at a profit before expiration. As discussed in the previous section, the Sell To Open order is used to sell new write options contracts. In comparison, the Sell To Close order is used to sell an existing options contract that you already own and it is used for both call and put options. What is the sell to close order? How do I close a long options position?

Using the Sell To Close order of course No other publicly traded financial instrument in the world has more types of trading orders than options. The variety of trading orders that options trading has is one of the first things that astonished options trading beginners and also one of the first mistakes options traders make. Indeed, using the wrong orders would no doubt result in unnecessary losses and frustration, which makes understanding how they work extremely important.

This tutorial will explain in detail what "Sell To Close" is. Sell To Close is to be used when selling options that you currently own, no matter call or put options.