Stock options allow investors to invest in the stock market often with less risk and less financial capital involved. Although options trade in a similar fashion to traditional stocks, they are actually quite different. You can close your position in an option as quickly as you want, and the process is faster than if you buy actual stock shares.
A stock option is a contract, where a buyer purchases the right to buy or sell 100 shares of a specific stock at a set price within a particular time frame, according to stock option information website The Options Guide. Stock options are typically more affordable than purchasing the underlying stock, and contracts cost between a few cents and a few dollars. While the option is active, the option holder may exercise his right to buy or sell the stock associated with the contract. The option holder may also buy or sell the contract that transfers the right to exercise the option.
Closing an Option Position
When you close an option position, you take the opposite position that you previously held. If you bought option contracts, you sell the same option contracts to close your position. This practice is also known as offsetting, indicates options website Discover Options. Generally, you can close out an option position at any time you choose prior to the expiration date of the contract. You may even close your position the next day if your position immediately pays off financially, or if you change your mind regarding your position.
You may either close your position or exercise your options as allowed by the contract terms at any time prior to and including the day your contracts expire. If you fail to do so, however, your options expire worthless. When your options expire, you lose any money you invested in securing the option position.
Settling Stock Options
Stock options have a distinct advantage over traditional stocks when it comes to closing your position. When you buy or sell a stock, the transaction typically takes three business days to settle before you have access to the funds or any proceeds you may have earned from that transaction. Stock options settle in one business day, so if you need to use the funds in your options account, you can close out a current position and take up a new position sooner than with traditional stocks.
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