5.1.6.2. Opening and Closing Positions
Unlike stocks, options are not issued by a corporation with a fixed number of shares. Their number 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.”
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.
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 $40 that expires on October 25 and you want to close out your position, 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 and protected yourself from any further movements in the stock price.
Does that mean you have no gains or losses? Not unless the premium on the two purchases is the same. Over time, it is likely your option has gained or lost some appeal to traders in options because the underlying stock has fallen or risen in value or because it is close to expiration. Most likely, your closing position will have a different premium from your opening position, which will result in a gain or a loss.
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