Information On Sell To Close Orders
There are many topics that you should try to understand fully before you actually get started with options trading. For example, you should certainly understand how options contracts work and the different types of options contracts that you can buy or sell. Once you have a decent knowledge of those topics it makes it much easier to understand the different orders used to buy and sell options. There is quite a range of different options order that options traders can use and this in itself is a fairly complicated subject. However, providing you can understand the four main types of options orders, of which the sell to close order is one, then you are in a position to start trading options.
The sell to close order is one of the two most simple and commonly used options orders along with the buy to open order. Basically the buy to open order is used to enter a position by buying options contracts, and the sell to close order is used to exit that position by selling those options contracts. The other two main options are essentially a reversal of that process; the sell to open order is used to enter a position by short selling options contracts and that position can be closed by using the buy to close order. You do need to understand the distinction between these four types of options order, but in practice using the sell to close order is actually a relatively straightforward process.
Using Sell To Close Orders
In very simple terms, there are two ways to make money in options trading: either by buying and selling options contracts for a profit, or by exercising an option for a profit. In practice, most options traders tend not to exercise their options and instead try to make their returns through the buying and selling of options contracts. There are a number of different options trading strategies that can be used, but the most basic strategy is to simply make a profit by buying options contract and then selling them when they go up in value.
When you buy stocks you are relying on them going up in value in order to make a profit by selling them; you can also receive dividends on stocks to make a profit. One of the big advantages of options trading is that you can also buy options contracts that make you money when the relevant stock goes down in value. This is because there are two main types of options contracts that you can buy, call options and put options.
Call options increase in value when the price of the underlying stock goes up, whereas put options increase in value when the price of the underlying stock goes down. Of course, the underlying security in options contracts can also be other financial instruments other than stock.
As mentioned above, it's possible to make money through buying options contracts and then exercising your option under the right circumstances. However, it really is somewhat easier to buy options contracts and simply sell them if they go up in valuenwhich is where the sell to close order is used. If you own call options on a particular stock, then you have the right to purchase that stock at an agreed strike price. If the current trading price of that stock is higher than the strike price in your options contracts, then you can exercise your option to buy that stock at the strike price and then sell the stock immediately for a profit.
However, assuming you bought the options contracts before the price of the stock went above the strike price, you could simply place a sell to close order to sell those options contracts and make a similar profit without having to worry about actually buying and selling the stock.
Owning put options gives you the right to sell the relevant underlying security at an agreed fixed price. So, if the underlying security was trading at a price lower than the strike price then you could buy the underlying security and the sell it at the strike price to make a profit. Again, though, it would be simpler to just place a sell to close order to close your position by selling those options contracts and making your profit that way. This is how most options traders will generally realize any profits they have made.
So in summary, it's clear to see that the concept of the sell to close order really is quite simple. It's basically the order used to sell options contracts that you already own. When you use the sell to close order, you are closing your positions and relinquishing any rights that the options contracts gave you to buy or sell the underlying security. You can use the sell to close order to realize any profits you have made through options contracts you own going up in value. You can also use the sell to close order to dispose of any options contracts you own that are falling in value, and cut your losses before their price drops any further.
How to Place Sell to Close Orders
To place a sell to close order you will need to use an options broker. An options broker will execute your order for you by selling your options contracts on the market at the going rate. There are different types of options brokers, including full service brokers that can offer you professional advice or discount brokers that simply carry out your orders and generally charge lower fees. Using online options brokers is generally regarded as the cheapest and simplest way to trade options.