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. Professionals

    5 Reasons Financial Advisors Still Choose Mutual Funds

    Take a look at five primary reasons why financial advisors still choose to recommend mutual funds over other types of investment vehicles.
  2. Professionals

    Internal Advisor Consultant: Career Path & Qualifications

    Discover more about the responsibilities of an internal advisor consultant, the average salary he can expect and the qualifications he will need for the job.
  3. Brokers

    Broker-Dealer Industry 101: The Landscape

    Independent broker-dealers are a great choice for experienced, self-starter planners who have established practices.
  4. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  5. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  6. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  7. Professionals

    Series 55

    FINRA Series 55 Exam Guide
  8. Professionals

    Series 62

    FINRA Series 62 Exam Guide
  9. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  10. Professionals

    Series 65

    FINRA/NASAA Series 65 Exam Guide
RELATED TERMS
  1. No results found.
RELATED FAQS
  1. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center