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selling to close
- Thread starter erol
- Start date
Quote from erol:
I was wondering about the mechanics of selling to close. How does this work if i'm long the call or put?
can I be stuck with a long call or put?
is the writer purchasing back the contract(s)? or is someone else picking up the long position?
I think the only problem would be if the Bid is at zero, if it expires worthless then you will be OK. But if on the last trading day it goes from zero to ITM you could be in trouble if you didn't close the position.
This is a good thread on what can happen if your long calls are at zero bid and you think the only loss is in the calls.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251
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Quote from erol:
I was wondering about the mechanics of selling to close. How does this work if i'm long the call or put?
can I be stuck with a long call or put?
is the writer purchasing back the contract(s)? or is someone else picking up the long position?
Truthfully, your questions aren't very clear.
The only thing I can add is your long options will be automatically exercised if they are in the money by $0.01, unless you contact your brokerage and let them know that you do not want exercised.
Quote from erol:
I was wondering about the mechanics of selling to close. How does this work if i'm long the call or put?
can I be stuck with a long call or put?
is the writer purchasing back the contract(s)? or is someone else picking up the long position?
There is nothing to worry about.
1) You 'sell to close' by entering an order to sell. It's just that simple. You entered an order to buy. Now you enter an order to sell.
It does not matter whether it's a call or put.
2) You can be stuck only when there is no bid. That happens only if you hold an option too long (after you know you were wrong to buy it) and expiration day is approaching.
3) Someone different is buying. Once you buy (or sell) an option, you are separated from the person with whom you made the trade. All XYX Mar 100 calls are fungible. That means they are interchangeable. You are not linked to the person with whom you traded originally. You need have no worries about this. The Options Clearing Corp takes care of who owns what. They have never gotten it wrong it 36 years.
Only potential problem was mentioned by others. If the option expires in the money and you have been unable to sell it (unlikely); and if you do not want to exercise the options, then all you have to do (and you MUST do it) is to notify your broker that you DO NOT want to exercise. The time to do that is immediately after the market closes on expiration Friday. Find out NOW how they want to be notified so you can do it - in the very unlikely event that it happens to you.
Mark
I would add one more thing. Exit your long put/call the Friday before expiration. Whether it is profitable or not, you will keep some time value. In other words, suppose your option is 10 points ITM. You may be able to sell this option for 12 (using limit orders and keeping an eye on the bid/ask spread). This is better than holding the thing for another week and possibly losing the entire profit and your premium. Now, suppose you have a loser. By exiting early, you will get some money back assuming the option isn't DOTM. Otherwise, it expires worthless and you lose the entire premium.