There are a few ways to close a call option position, depending on whether you're the buyer (holder) or seller (writer) of the call option.
Closing a Call Option You Bought (Long Call):
If you bought a call option, you have the right, but not the obligation, to buy the underlying asset at the strike price before the expiration date. You can close your position in one of these ways:
- Sell to Close: This is the most common method. You sell the call option back into the market. If the option's price has increased since you bought it, you'll profit. To do this, you would place an order to "Sell to Close" the same call option (same strike price and expiration date) through your brokerage account.
- Exercise the Option: If the market price of the underlying asset is higher than the strike price of your call option, you can exercise the option. This means you buy the underlying asset at the strike price. You would then typically immediately sell the asset in the open market to realize a profit. This is more complex and may involve additional transaction fees.
- Let it Expire: If the market price of the underlying asset is below the strike price at expiration, your call option will expire worthless. You won't exercise it, and you lose the premium you paid for the option. This is acceptable if you believe it will expire worthless; you don't need to take any action.
Closing a Call Option You Sold (Short Call):
If you sold a call option (also known as writing a call), you have the obligation to sell the underlying asset at the strike price if the option is exercised. Here's how to close your position:
- Buy to Close: The primary way to close a short call position is to buy back the same call option (same strike price and expiration date) in the market. This offsets your obligation. If the option's price has decreased since you sold it, you'll profit. To do this, you place an order to "Buy to Close" through your brokerage account.
- Let it Expire: If the market price of the underlying asset remains below the strike price at expiration, the option will likely expire worthless, and the option buyer will not exercise their right. You keep the premium you received when you sold the option, and your obligation is over.
- Assignment (Exercise by the Buyer): If the market price of the underlying asset is above the strike price at expiration, the option buyer is likely to exercise the option. In this case, you'll be assigned, meaning you're obligated to sell the underlying asset at the strike price. You will likely be contacted by your broker. This is typically undesirable for the seller, as you lose any potential gains above the strike price.
Summary Table:
| Role | Action | Scenario | Outcome |
|---|---|---|---|
| Buyer | Sell to Close | Option price increased since purchase | Profit (difference between selling price and purchase price, minus commissions) |
| Buyer | Exercise | Market price > Strike price | Buy asset at strike price, potentially sell immediately for profit (minus commissions and fees) |
| Buyer | Let Expire | Market price < Strike price | Lose premium paid for the option |
| Seller | Buy to Close | Option price decreased since sale | Profit (difference between selling price and purchase price, minus commissions) |
| Seller | Let Expire | Market price < Strike price | Keep premium received when selling the option |
| Seller | Assignment | Market price > Strike price | Obligated to sell asset at strike price; may lose potential gains above strike price |
Important Considerations:
- Commissions and Fees: Remember that buying or selling options involves brokerage commissions and potentially other fees.
- Market Volatility: Option prices can fluctuate significantly due to market volatility.
- Time Decay: Option values decay over time, especially as expiration approaches.
- Risk Management: Understand the risks associated with options trading before engaging in it. Consider using strategies like stop-loss orders.
