For every option trader placing a buy order there has to be a trader willing to take the sell side. Option buyers pay out money to open their trades but option sellers receive money, which is known as the option premium, to accept the risk of holding an option short. When the option seller wants to close out their short positions, they must buy a call to exit the trade.
Go online to your options trading account and open your portfolio window. Options you hold long are identified by a +1, while options you hold short are indicated by a -1. Find the short option month and strike price you want to close. Since you sold the option to open the trade, you need to purchase the corresponding option to close the trade. For example, if you sold a February 2013 call option with a 500 strike price, you must buy back a February 2013 call option with a 500 strike price to exit the trade.Step 2
Determine if you are better off letting the option expire worthless to keep the full premium or buying back the option to close the trade. If the security price is falling, it will cost you less to buy back the option. For example, you received $300 -- $3 option price multiplied by 100 stock shares -- for selling the option. If the option is currently worth $200 -- $2 option price multiplied by 100 stock shares -- you can buy it back and still make $100 -- $300 selling price minus $200 buyback price -- on the trade less commission.Step 3
Buy the option back if the security price is rising. As an example, you opened your trade by selling an option with a strike price of 250 when the stock traded at $30 a share. You received $300 -- $3 option price multiplied by 100 stock shares -- for selling the option. Two weeks later, the stock price hits $38 a share while the option 250 strike buyback price has increased to $450 -- $4.50 option price multiplied by 100 stock shares. Calculate your loss by subtracting the option sell price of $300 from the current buyback price of $450, which is $150.Step 4
Go to your order entry page and select the option you want to buyback. Pull up the option chain and select the option with the same month and strike price. Enter the option trade information and select “buy” as the action. Be sure you are buying back the same number of options you sold. When finished, check your portfolio to be sure the negative stock option is no longer there.
- One option controls 100 shares of stock. An option price is listed for one stock shares, so multiple the price by 100 to get the option’s total cost.
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