Buy to Close

What Is Buy from Close's point of view?

"Buy to close" alludes to terminology that traders, essentially option traders, use to exit an existing short position. In market speech, it is perceived to mean that the trader needs to close out an existing option trade. Technically talking, it means that the trader needs to buy an asset to offset, or close, a short position in that equivalent asset.

Understanding Buy to Close

There is a nuanced difference between a buy-to-close option and a buy-to-cover purchase. The former alludes predominantly to options, and some of the time futures, while the last option ordinarily alludes to stocks as it were. The final product is similar in the two cases. Basically, it is the buying back of an asset initially sold short. The net outcome is no exposure to the asset.

The term buy to close is utilized when a trader is net short an option position and needs to exit that vacant position. At the end of the day, they as of now have a vacant position, via [writing an option](/composing an-option), for which they have received a net credit, and presently look to close that position. Traders regularly utilize a "sell-to-open" order to lay out this open short option position which the "buy to close" order offsets.

On account of stocks, selling assets short includes borrowing the asset from another entity. For futures and options, the interaction includes composing a contract to sell it to another buyer. In the two cases, the trader trusts the price of the underlying stock moves lower to create a profit at the trade's closing.

For stocks, and notwithstanding bankruptcy in the underlying company, the best way to exit the trade is to buy shares back and return them to the entity from whom they were borrowed. In a futures transaction, the trade closes at maturity or when the seller buys back the position in the open market to cover their short position. For an options position, the trade closes at maturity, when the seller buys back the position in the open market, or when the buyer of the option practices it. In all cases, in the event that the purchase or cover price is not exactly the selling or shorting price, there is a profit for the seller.

Shorting Against the Box Positions

It is feasible to carry a short position in an asset and a long position in a similar asset simultaneously. This strategy is called shorting against the box. This permits a contrary position without compelling the trader to close out their initial vacant position, which contrasts from a "buy-to-cover" order.

There are many justifications for why traders would do this, however the primary purpose is to keep up with the history of the long position. For instance, a stock held in an account for a long time could have a sizable unrealized profit. Rather than selling it to exploit short-term market conditions and triggering a tax liability, the trader can short the stock by borrowing the shares, generally from their broker.

It is important to note that not all brokers permit this type of transaction. Moreover, changes in taxation rules trigger the liability at the hour of the short sale. Subsequently, while it is feasible to do, this kind of transaction is presently not alluring or functional. A similar applies to holding a short position and afterward endeavoring to purchase a long position. Most brokers will only offset the two positions, basically making a buy-to-close situation.

Features

• Traders regularly utilize a sell-to-open order to lay out open short option positions, which the buy-to-close order offsets.
• Buy to close is utilized when a trader is net short an option position and needs to exit that vacant position.
• Buy to close alludes to terminology that traders, principally option traders, use to exit an existing short position.