by Nagesh Kamath
Question by Just Some Guy: Is selling to close a call option the same as exercising the option at the strike price then selling it?
This has been confusing me for some time, any help would be appreciated. I can’t seem to tell if it’s the same as exercising the option then selling it, or if it’s just selling the option at the bid price. Which one is it? Thanks in advance.
Best answer:
Answer by Alan
Selling to close is selling the option at the bid price. The buyer then has the right to exercise the option, or it closes a position he has. Exercising it then selling the shares exercises the option, and it no longer exists. Usually, selling at the bid gets you more, but sometimes, if an option is close to expiration and the spread is wide, exercising and selling gets you more. For instance, if you have an option to buy XYZ at , the share price is at , and the bid is .20, then you get more by hitting the bid (.20) than by exercising and selling ( – =). However, if the bid were .80, exercising and selling would yield more.
What do you think? Answer below!
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Tags: call, close, exercising, Option, price, same, Selling., strike
If you exercise a call, then sell the stock, it costs you more:
If you sell the option, all you pay is the commission when you sell it.
If you exercise it, you pay a commision of stock cost which is the strike price times the number of shares. Then you would pay another commission on the sale of the stock itself.
Also you might exercise the option and immediately after that the price could drop and you wouild take a loss on that. Of course it could also go up in price and more than cover the extra expenses.
Just to add to the other two answers (which are correct). There are basically three kinds of option selling.
If you own an option contract, then you “Sell to close” to exit your position without exercising. You are “closing” your position. You can set your price higher than the bid price with a limit order (what I usually do), altough it might not get filled right away.
This is distinguished from “Sell to open,” in which case you are basically shorting the option that you don’t own (selling it hoping that it decreases in value). In this case you would have to either buy the call option later or buy shares of the stock on the open market and then sell them to the option holder at the strike price of the option. If the strike price of the call option was higher than the price of the stock at expiration, then the contract would be worthless and you wouldn’t have to do anything.
You can also “Write a covered call” in which case you are selling a call option on stock that you already own. This is a beginner friendly strategy which I answered previously (see source).