Education Series on Derivative Contracts
Closing buy refers to a purchase transaction which has
the effect of closing out a short position(sale position) partly or
wholly. For example, a call option seller can close his short position
through the purchase of a call option and this is similar to short
covering in the equity segment.
In order to cover a short position in call having some special
features such as underlying asset, strike price, exercise date etc, one
should select a call option having the same characteristics. Note that
a call option cannot be closed out by a put option or vice versa.
Though both the options should fundamentally be the same ,the premium
on which they are bought and sold may be different since this is
determined by the market forces from time to time. It gives an
opportunity to the trader to make gains from buying and selling of
option contracts. For example, if the sale of the contract was at a
higher premium than the premium for purchase, the trader would have
made a profit in the above case.