Closing transaction

Every option position starts with an opening transaction — buying or selling to create a new position. It ends, sooner or later, with a closing transaction: the trade that reduces or eliminates that position.

The rule for what counts as closing is precise. It is not enough to trade an option on the same underlying, or even the same expiry. A closing transaction must be the same series — same strike price, same expiry date — as the position being closed. A trader cannot close a long call by buying a put instead; that is a different position, not a closing trade.

The market calls this "squaring off" a position. A closing purchase covers a short; a closing sale reduces a long.

Chapter 16, section 16.1, defines both sides of an option position and both sides of closing it: an opening purchase (long) or opening sale (short) adds to or creates a position. A closing purchase is a transaction whose intent is to reduce or eliminate an existing short position — often called "covering" a short. A closing sale reduces or eliminates an existing long position.

The workbook is explicit on the matching requirement: a closing transaction must involve the sale or purchase of an option contract with the same contract specifications — the same strike price and the same expiry date — as the position it closes. Contract size (lot size) is set by the exchange for each underlying; for example, the workbook uses a Nifty option lot size of 50 in its worked illustrations.

A trader opens a position by selling (writing) 2 lots of a Nifty 22,500 Call expiring on the last Thursday of the month, at a lot size of 50, receiving a premium of Rs 150 per unit.

Premium received on opening = 2 × 50 × Rs 150 = Rs 15,000

A month later, with the option now cheaper at Rs 40, the trader wants out. They place a closing purchase — buying back the same 22,500 Call, same expiry, same 2 lots:

Cost to close = 2 × 50 × Rs 40 = Rs 4,000
Net profit on the position = Rs 15,000 − Rs 4,000 = Rs 11,000

Had the trader instead bought a 22,500 Put, or a Call at a different strike, that would not have closed the original position at all — it would have opened a fresh, separate position alongside the still-open short call.

Chapter 16 (Introduction to Options), section 16.1, sets out opening and closing transactions as the foundation for everything that follows on contract specifications. Expect a question that names a trader's original position and a proposed offsetting trade, and asks whether it actually closes the position — testing the same-strike, same-expiry requirement.

• A closing transaction must match strike and expiry exactly. A trade in a different series is a new position, not a closing one, however similar it looks.
• "Closing purchase" covers a short; "closing sale" reduces a long — the two terms are easy to swap by mistake.
• You cannot close a call position with a put trade — the workbook states this as an explicit note, because it is a common wrong instinct.
• "Squaring off" is the market's everyday name for a closing transaction — the two terms mean the same thing.