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
The term collar refers to an options strategy involving both the purchase of protective puts and the selling of call options. Collars also require the investor to hold shares of the underlying securities.
Moneyzine EditorJanuary 11th, 2024- The term opening transaction refers to the process of creating a position taken by an investor in the options market. The opening transaction creates the rights and obligations under an options contract.Moneyzine EditorSeptember 20th, 2023
- The term option class refers to the total of all call or put options available for the same underlying asset. Option class refers not just to the type of option, but also the style of option such as European or American.Moneyzine EditorSeptember 20th, 2023
The term cash settlement refers to the process of resolving the terms of an option contract through the payment or receipt of money rather than physical delivery or receipt of the underlying stock or commodity. Cash settlement provides investors with a convenient way to participate in the futures and options market.Moneyzine EditorJanuary 10th, 2024
