A sell to close order is an order type that is used to close an existing short position. A short position is a position that is created when a trader sells a security that they do not own and hope to buy the same security back at a lower price so they can have a profit. A sell to close order is used to close out this position by buying the security back at the current market price.
For example, let’s say you sold 100 shares of XYZ stock at $10 per share. This creates a short position. To close out this position, you would place a sell to close order to buy 100 shares of XYZ stock at the current market price. If the stock is now trading at $11 per share, you would have a $1 per share profit. What if I don't have the money to exercise a call option? If you don't have the money to exercise a call option, then you will not be able to do so. This is because you would need to have the funds available in order to pay for the underlying asset that you are attempting to purchase through the option. Can you sell to close before expiration? Yes, you can sell to close before expiration. In fact, you can sell to close your position at any time during the life of the option contract. The only time you cannot sell to close is when the market for the underlying security is closed. Is it better to sell an option or exercise? It depends on your goals. If you are looking to make a quick profit, then selling the option may be the better choice. However, if you are looking to hedge your position or protect your downside, then exercising the option may be the better choice.
Is sell to close the same as exercise?
The two terms are not interchangeable. "Sell to close" indicates that the trader intends to sell their position in the security, while "exercise" refers to the act of using the security in accordance with the terms of the contract. For example, if an investor holds a call option, they have the right to purchase the underlying asset at a set price (the strike price). If they choose to exercise their option, they would be buying the underlying asset at the strike price. When should you buy to close? If you are long a position and wish to close it out, you would place a buy to close order. This is the opposite of a sell to close order, which is used to close a short position.