What is a Closing Sale?

Malcolm Tatum

The closing sale is a type of transaction that allows an investor to end a purchased position associated with a given option. Closing sales are often employed when an investor wishes to exchange a long position for a short one, or vice versa. Generally, the approach will involve selling the stocks options when the contract is near to close. Around the same time, the investor will purchase an option series with the same terms as the option that is being sold, with the difference being the position date associated with both actions.

Retail sales associates need to be able to close a sale with customers.
Retail sales associates need to be able to close a sale with customers.

The function of the closing sale is to allow the investor the opportunity to maximize the chance of making a return on investment in a given set of stocks. By purchasing a block of shares associated with the option, the investor can enjoy the benefits of returns for the duration of the ownership. As the position on the investment grows short, the investor moves to sell the currently owned options and effectively replace them with similar options that have a longer position. This allows the investor to continue enjoying the benefits associated with owning the shares.

Another common result of a closing sale is the investor is able to minimize the amount of open interest associated with a given option. By selling near close and investing in more shares of the same, the closing sale helps to control the interest accrued. This is because the investor has surrendered all rights on the options associated with the original purchase, and is in effect beginning anew with a new purchase. This is true even though the stock option involved in both the sale and the purchase has the same terms.

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The closing sale is a common strategy used by investors to minimize loss and maximize the amount of return on a given option. Often, the purchase and the sale can be completed with a twenty-four hour trading window, so the fluctuation in the value of the stock portfolio is almost non-existent. Brokers are generally able to execute the purchase and sale orders associated with a closing sale in quick succession.

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