What does 'Buy To Close' mean?

Buy to close is the purchase of an option position. A trader will buy an asset to offset, or close, a short position in that same asset. Essentially, it is the buying back of an asset initially sold short. The net result is no exposure to the asset.

BREAKING DOWN 'Buy To Close'

There is a nuanced difference between a buy to close option and a buy to cover purchase. The former refers to futures and options, while the latter typically refers to stocks only. The net result is the same, however.

In the case of stocks, selling assets short involves borrowing the asset from another entity. For futures and options, the process involves writing a contract to sell it to another buyer. In both cases, the trader hopes the price of the underlying stock moves lower to generate a profit at the trade's closing.

For stocks, and barring bankruptcy in the underlying company, the only way to exit the trade is to buy shares back and return them to the entity from whom they were borrowed. In a futures transaction, the trade ends at maturity or when the seller buys back the position in the open market to cover their short position. For an options position, the trade ends at maturity, when the seller buys back the position in the open market, or when the buyer of the option exercises it. 

In all cases, if the purchase or cover price is less than the selling or shorting price, there is a profit for the seller.

Buy to Close and Shorting Against the Box Positions

It is possible to carry a short position in an asset and a long position in the same asset at the same time. This strategy is called shorting against the box. There are many reasons why traders would do this, but the primary purpose is to maintain the history of the long position. For example, a stock held in an account for many years might have a sizable unrealized profit. Instead of selling it to take advantage of short-term market conditions and trigger a tax liability, the trader can borrow other shares to sell short.

Not all brokers allow this type of transaction. Additionally, changes in taxation rules trigger the liability at the time of the short sale. Therefore, while it is possible to do, this sort of transaction is no longer desirable or practical.

The same applies to holding a short position and then attempting to purchase a long position. Most brokers will merely offset the two positions, essentially creating a buy to close situation.

RELATED TERMS
  1. Short Sale

    A short sale is the sale of an asset or stock unowned by the ...
  2. Net Short

    Net short is a portfolio or trading position leveraged to an ...
  3. Short Selling

    Short selling is the sale of a security that is not owned by ...
  4. Weak Shorts

    Weak shorts refer to traders or investors who hold a short position ...
  5. Short Sell Against the Box

    A short sell against the box refers to the act of short selling ...
  6. Close Position

    Closing a position refers to a security transaction that is the ...
Related Articles
  1. Investing

    Short selling basics

    Short sellers enable the markets to function smoothly by providing liquidity and also serve as a restraining influence on investors’ over-exuberance.
  2. Investing

    Short Selling Risk Can Be Similar To Buying Long

    If more people understood short selling, it would invoke less fear, which could lead to a more balanced market.
  3. Trading

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  4. Trading

    Short interest: What it tells us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  5. Trading

    The Short Squeeze Method

    The short squeezed strategy can be risky - but also very rewarding - for those who master it.
  6. Investing

    How To Talk Like An Investor

    Learn the lingo to start talking like an informed investor and make wise investment decisions in financial markets. Find out terms used in stock trading.
  7. Trading

    Short Squeeze

    A short squeeze refers to a jump in a stock's price, forcing a large number of short sellers to close their position, which in effect pushes the price even higher. When an investor shorts a stock, ...
RELATED FAQS
  1. What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being ... Read Answer >>
  2. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  3. How long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
  4. How is it possible to trade on a stock you don't own, as is done in short selling?

    Understand how the process of short selling allows a person to sell a stock without technically owning it. Read Answer >>
  5. Short Selling Vs. Put Options: How Payoffs Differ

    The payoff difference between the two comes down to the difference between option and obligation. Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center