4.1.7.2. Opening and Closing Positions
Unlike stocks, options are not issued by a corporation with a fixed number of shares. Their quantity in the market is determined by the demand for them. 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 you are buying or selling “to open” or “to close.”
Someone who either buys or sells a call or put 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.
Closing a position occurs when a holder or writer of an option takes the opposite side of the same option contract. For example, if you are long a put on September corn at 420’2 that expires in three weeks and you want to close out your position, you can offset that purchase now by selling the same position. You will acquire a short put on September corn with the same strike price and expiration date. You have successfully closed your long position by acquiring an identical short position on the underlying futures contract and protected yourself from any further movements in its price.
If the premiums on your positions have changed over time, you will incur profits or losses. Most likely, your closing position will have a different premium from your opening position because its intrinsic and time value will have changed.
Suppose in February you open a short call option on September corn futures when the premium you receive is 40 cents per bushel. It is now April, this call option is out of the money, and the option is trading at 10 cents. If you think the price of the underlying contract will go back up, you may want to close your position by going long the same contract and locking in your profits of 30 cents per bushel. While an option writer does not have the right to exercise a contract, she may close o