So you have an open option position either buy going long on a call or put, or by selling a ‘naked’ or ‘covered’ option. However you’re not quite sure which is the one that will close out your position. If you need a refresher of the ways you can open an option position read about it here. We know that the order entry we use to open a position is either ‘buy to open’ or ‘sell to open’.
There are also two ways that you can close out and open position; Sell to close and Buy to close.
Sell to Close is the more common exit order people tend to use, mostly because the average investor simply goes long with either a call or a put. The way this position would have been opened would have been with a ‘buy to open’ order. In short either a call or put was purchased, thus opening the position, then the only way to close it without actually having to involve the stock would be to execute a sell to close order.
An open options position can also be closed with a buy to close order. Now at first glance this may seem like a contradiction of terms. Most people never think of buying a stock or option in order to get out of a trade.
All you are simply doing is buying back the option or options you ‘sold to open’ trade. This is the order you would execute when closing out a short position or one where to sold an option to collect a premium.
The ‘sell to open’ and ‘buy to close’ orders are the orders we use when implementing our strategy of writing covered calls. Of course you can sell the options without actually owning the stock.
You would just be selling a naked position. This is riskier trade from the standpoint that your losses are technically infinite as the price of the stock could theoretically move in any direction.
Improper order execution is a needless mistake that many traders often make, both new and experienced. Always protect your capital and never lose any money by just clicking a wrong order entry.
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