Derivatives - Closing Transactions

By definition, a closing transaction reduces or eliminates a long position and a short position.

An option can close in one of two ways:

  1. Exercise, in which the option holder elects to put into effect the rights that the instrument confers.

  2. Expiration, in which the option just runs out of time.
  • Upon exercise, the buyer sends the writer an exercise notice, sometimes called an exercise assignment, which requires the writer to sell the security in the case of a call option, or to buy the security in the case of a put option, at the specified strike price.

  • In the case of expiration, there is no further communication or trading necessary between the holder and the writer; the long and short positions just evaporate.

Reading Options Transactions Shorthand
There is shorthand for expressing options transactions. Let's say you saw this on the Series 7 exam:

1 JKL March 90 call @ 2

You would read that as "a call option on one block of 100 shares of JKL Corp. stock, expiring in March, with a strike price of $90, with a premium of $2 per share".

You would not read that last part as "$2 per block of 100 shares". Still, you can see the appeal of an option: in this example, you take a position on a stock for $2 per share instead of $90 per share. Not only that, but by either buying a put or writing a call, you can bet that the share price will go down; when buying the underlying stock, you can only bet on it going up.

The precise time of expiration is Central time, on the Saturday following the third Friday of the month. An order to exercise must be submitted by Central time on that third Friday.

When To Exercise An Option


Related Articles
  1. Options & Futures

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  2. Options & Futures

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  3. Options & Futures

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  4. Options & Futures

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  5. Options & Futures

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  6. Options & Futures

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  7. Options & Futures

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.
  8. Options & Futures

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  9. Options & Futures

    The Basics Of Covered Calls

    Learn how this simple options contract can work for you, even when your stock isn't.
  10. Options & Futures

    How To Sell Put Options To Benefit In Any Market

    As long as the underlying stocks are of companies you are happy to own, put selling can be a lucrative strategy.
RELATED TERMS
  1. Pin Risk

    A risk that the writer of an options or futures contract faces ...
  2. Call Over

    When the buyer of a call option exercises the option. In options ...
  3. Call On A Call

    A type of compound option in which the investor has the right ...
  4. Allocation Notice

    An official notification from an options clearing firm to the ...
  5. Exercise

    To put into effect the right specified in a contract. In options ...
  6. Early Exercise

    The exercise of an option prior to its expiration date. Early ...
RELATED FAQS
  1. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  2. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  3. What is the difference between "right" and "obligation" on a call option?

    Learn what a call option is, what determines a buyer and seller of an option, and what the difference between a right and ... Read Answer >>
  4. After exercising a put option, can I still hold my option contract in order to sell ...

    Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to ... Read Answer >>
  5. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  6. How is a put option exercised?

    A put option is a contract that gives the option holder the right, but not obligation, to sell a set amount of shares (1 ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center