In the world of options trading, understanding key order types is essential for managing risk and maximizing returns. One of the most fundamental actions traders take is the sell to close order—a critical step in exiting a long options position. Whether you're a beginner learning the basics or an experienced trader refining your strategy, mastering when and how to use "sell to close" can significantly impact your success.
This guide breaks down everything you need to know about sell to close orders, including how they work, real-world examples, and practical insights into their role in options trading strategies.
What Is Sell to Close?
A sell to close order refers to the act of selling an options contract that you currently own in order to exit a long position. When a trader buys an option—using a buy to open order—they establish a long position. To close that position later, they place a sell to close order.
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This concept primarily applies to derivatives like stock options but can also appear in equity or fixed-income markets when closing long holdings. Unlike a sell to open (used to initiate a short position), a sell to close reduces exposure by liquidating an existing long contract before expiration.
Key Takeaways
- Sell to close is used to exit a long options position established via a buy to open order.
- It allows traders to realize profits or limit losses before expiration.
- The option can be sold whether it's in the money (ITM), out of the money (OTM), or at the money (ATM).
- Even OTM options with residual time value may be sold rather than allowed to expire worthless.
How Does Sell to Close Work?
In options trading, once you own a contract, you have three ways to handle it:
- Let it expire worthless (if OTM).
- Exercise it (if ITM) to buy or sell the underlying asset.
- Sell to close—sell the contract on the open market.
Most retail traders prefer selling to close instead of exercising options because it’s more efficient and cost-effective. Brokerage fees for exercise and assignment are often higher, and selling captures both intrinsic and remaining extrinsic value.
For example, if you hold a call option that’s gained value due to rising stock prices, placing a sell to close order locks in your gains without needing to purchase the actual shares.
Why Traders Use Sell to Close
Traders use this order type for several strategic reasons:
- Profit Realization: When an option has appreciated in value, selling closes the trade and secures gains.
- Loss Limitation: If the underlying asset isn’t moving favorably, selling early can recover some premium instead of losing it all.
- Time Decay Management: As options lose extrinsic value over time (theta decay), selling before expiration helps preserve value.
- Portfolio Rebalancing: Closing positions frees up capital for new opportunities.
Even if an option is out of the money, it might still carry time value. Selling it via sell to close could yield a small return rather than accepting zero at expiry.
Practical Examples of Sell to Close
Let’s walk through realistic scenarios using a call option on Company A.
Initial Trade Setup
- Stock price: $175.00
- Strike price: $170.00 call
- Expiration: 90 days away
- Option premium paid: $7.50 per share
Breakdown:
- Intrinsic value: $5.00 ($175 – $170)
- Extrinsic value: $2.50 ($7.50 – $5.00)
Now let’s examine three potential outcomes when the trader decides to sell to close.
Example 1: Selling for a Profit
Assume Company A’s stock rises to $180.00 by expiration:
- New intrinsic value: $10.00 ($180 – $170)
- Extrinsic value: $0.00 (expires worthless)
- Option value: $10.00
The trader sells to close at $10.00:
- Profit = $10.00 – $7.50 = $2.50 per share
- For one contract (100 shares): $250 profit
This demonstrates how capitalizing on upward movement maximizes returns.
Example 2: Breaking Even
Stock rises only to $177.50:
- Intrinsic value: $7.50
- Extrinsic value: $0.00
- Option value: $7.50
Selling at $7.50 means:
- Net gain = $7.50 – $7.50 = $0.00
- Position closes at break-even
While no profit is made, avoiding a loss is still a win—especially compared to letting poor-performing options drain capital.
Example 3: Selling at a Loss
Stock reaches just $176.00:
- Intrinsic value: $6.00
- Extrinsic value: $0.00
- Option value: $6.00
Selling now results in:
- Loss = $6.00 – $7.50 = –$1.50 per share
- Total loss: $150 per contract
Even though it’s a loss, acting early prevents losing the full $7.50 if the stock had dropped further.
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Frequently Asked Questions (FAQ)
Q: Can I sell to close anytime before expiration?
A: Yes, as long as the market is open and there’s liquidity, you can place a sell to close order at any time before expiration.
Q: What happens if I don’t sell to close and the option expires ITM?
A: Most brokers will automatically exercise in-the-money options unless instructed otherwise. However, this may trigger unwanted share purchases or tax implications.
Q: Is selling to close better than exercising the option?
A: Generally yes—selling avoids exercise fees and captures remaining time value, making it more efficient for most traders.
Q: Can I use sell to close on put options too?
A: Absolutely. If you bought a put option (buy to open) and want to exit, you would use sell to close, regardless of whether the underlying moved up or down.
Q: Do I need special approval to place sell to close orders?
A: No—since you’re closing an existing position, no additional options trading level is required beyond what was needed to open the trade.
Q: What affects the price I get when I sell to close?
A: Market demand, implied volatility, time decay, and moneyness (ITM/OTM status) all influence the sale price.
Core Keywords for SEO
Understanding these core terms enhances both comprehension and search visibility:
- Sell to close
- Options trading
- Buy to open
- Long position
- In the money (ITM)
- Out of the money (OTM)
- Time decay
- Option premium
These keywords have been naturally integrated throughout this article to align with common search queries while maintaining readability and educational value.
Final Thoughts
Mastering the sell to close order is vital for any options trader aiming for disciplined, strategic exits. Whether locking in profits, minimizing losses, or managing portfolio flow, knowing when and how to close a position separates successful traders from those who leave gains on the table—or worse, incur avoidable losses.
By combining technical understanding with real-time decision-making, traders can optimize their performance in dynamic markets.
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