Education Series

Education Series on Derivative Contracts

Closing Buy:

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.