"Closing Short Options Positions"

"Selling" Short Options Positions?

"Is it posible to sell our short position we made selling options? If it is where can I find Quotations?"
Asked By Danon Bajon on 30 January 2009

Answered by Mr. OppiE

Hi Danon Bajon,

First of all, lets break down your question so that we know exactly what your question is. Firstly, by "Is it possible to SELL...", I am assuming that to "SELL" means to "Close the position". Secondly, by "our short position we made selling options", I am assuming that you are referring to a naked short position you created by writing either call and/or put options using a SELL TO OPEN order. So far, your question is whether is it possible for you to close a short option position and the last part is where you can find quotation to close that position. I hope I got your question correct so far.

Closing a naked short option position that was created using the SELL TO OPEN order is extremely simple. All you have to do is to use the BUY TO CLOSE order on those options trading positions. When you put on the short options position using the SELL TO OPEN order, you were instructing the options trading broker to "Open" (meaning to start) the position by "Selling" that options contract in the open market. In order to close that position, you now have to tell the broker to "Close" the position by "Buying" those options contracts back from the open market using the BUY TO CLOSE order.

When you shorted those options using the SELL TO OPEN order, you were shorting them based on the prevailing "Bid" price of that option. Therefore, the "quotation" to use when you use the BUY TO CLOSE order would be the "Ask" price of that same option. In options trading, you always buy on the "Ask" price and sell on the "bid" price.

In conclusion, To reiterate, in order to close those short options positions that you are now holding, all you have to do is to use the BUY TO CLOSE order using the prevailing "Ask" price of those options. To learn about all the other orders, please refer to our Types Of Options Orders tutorial.

Response by Danon Bajon...

When we are closing position, do we have to use options with the same expiration date?

Reply by Mr. OppiE...

When you close your short options position, you BUY TO CLOSE the exact same options that you previously SELL TO OPEN.

For example :

You SELL TO OPEN 1 contract of QQQQ January $30 Call at its bid price of $2.00. After a while, QQQQ rises instead of falls and you want to close the position to prevent further losses. You BUY TO CLOSE those QQQQ January $30 Call at its prevailing ask price of $3.00. In doing so, you actually bought at $3.00 and sold at $2.00, incurring a $1.00 loss.

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