It is a bearish strategy. Instead, you take on an obligation that involves the delivery of the underlying asset. With options, the obligation is contingent on how the price of the underlying asset behaves. You buy to close a contract position to lock in a profit, limit a loss and absolve yourself of your delivery obligation.
For call options, intrinsic value comes when the price of the underlying asset exceeds the strike price -- the agreed selling price of the asset. An in-the-money put option has the reverse relationship. American-style options can be exercised any time until expiration, which means a short-seller may be assigned a delivery before the option expires.
If you write a call that is assigned, you must deliver the asset at the strike price. If you write a put, you must buy the asset at the strike price if the put is assigned. By closing a position, the position would no longer exist in your account and the resultant profit or loss would be realized. There are two main ways to close an options position; Selling a long position or Buying a short position.
Buy To Close is used for buying back a short position. When you Buy To Close BTC an options contract , you are actually buying back the options contracts that you previously created and sold from a market maker in order to realize a profit or loss.
Writing options is options trading term for shorting an option. Buy To Close call options relinquishes your obligation under the contract and you will no longer benefit from further decay of their extrinsic value. Important Disclaimer : Options involve risk and are not suitable for all investors. This placed you in a short position regarding the underlying security.
When you are ready to exit the trade, the buy to close transaction order closes out your short position. For a put trade to profit, the underlying security price must fall enough to drive the put option price below the break-even point.
When you establish a short option position, you are credited with the option premium. The short position also makes you vulnerable to large losses should the trade move swiftly against you. As more the price of the underlying security continues to rise, the greater your loss will be. Based in St. Petersburg, Fla. She received a bachelor's degree in business administration from the University of South Florida. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.
Here are the possible scenarios that can happen and the steps you might take:. In other words, when you buy to open, you believe that the prices will go up in the future. This move ends with selling to close.
When you sell to open, it would be the move based on belief that the price will go down and it ends with buying to close. As you can see, options trading is a rather complex topic. And it is only a small part of a larger context. All of this may sound daunting, but when you start learning from professionals who simplify complex topics, it all becomes clear and you begin to see the bigger picture. If you want to learn more about investing, trading, economics and other topics, enter the Academy of Money MNYMSTRS today and start learning for free — in a fun, self-paced, encouraging environment.
Empower yourself through knowledge. We are here to support you every step of the way. Compound your knowledge. Sign up for the Academy of Money Mastery and explore how far your learning can take you. Account settings About. Buy to Close Buy to close vs. Sell to open. Buy to Open vs.
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