Closing Transaction

Definition

The term closing transaction refers to any process that reduces or eliminates an existing position taken by an investor in options.  The most common examples of closing transactions include the sale of a long option or the purchase of a short option.

Explanation

A closing transaction is any process that effectively reduces or eliminates an existing position in the options market.  An option can close in several ways, including the option holder exercising their rights under an existing agreement.  For example, the writer of a call option might be assigned by the buyer of the call, requiring them to sell the security.  In the case of a put, the holder could force the writer to buy the security at the strike price.

Finally, an option may reach its expiration date in an out-of-the-money condition.  If this occurs, none of the parties to the option have an obligation to each other and the long and short positions expire worthless.

Related Terms

collar, opening transaction, option class, cash settlement