Opening and Closing Positions
Unlike stocks, options are not issued by a corporation with a fixed number of shares. Their number is determined by demand. To keep track of the total number of open positions, each option order must state, not just whether it is a buy or sell, but whether it is a buy or sell that is opening or closing a position.
When someone buys or sells a call or put, the buyer is generally said to be opening a position. The buyer of a call or put is opening a long position. The seller of a call or put is opening a short position. The buyer is making an opening purchase; the seller an opening sale.
Remember that an option trader can exercise an option or trade an option. When an option holder trades the option, it is also called closing the position. The price of an option changes over time. As it goes more into the money, it will increase in value, but as it goes out of the money, it will decrease in value. An option trader can simply choose to close out a position and accept the difference in the premiums as her gains or losses on the investment.
Closing a position occurs when a holder or writer of an option takes the opposite position on the same option contract. For example, if you are long a put on Salmonella Seafoods at $20 that expires on October 25 and you want to close out your position and take your profits, you can offset that purchase by selling the same position. You will acquire a short put on Salmonella with the same strike price and expiration date. You have successfully closed your long position by acquiring an identical short position on the same stock