What is Buy to Close?

Buy to Close is the act of repurchasing options contracts that were previously sold to close a short position before the expiration date. This step is commonly taken to secure profits (take profit) or limit losses (cut loss) and avoid assignment risk.

Buy To Close - Short Call

The profit or loss from Buy to Close is calculated from the difference between the premium received when opening the position and the premium when the position is closed.

General formula:

Premium received - Premium at Buy to Close

Example:

You sell an options contract and receive a premium of $5 per share.

Profit Scenario (Premium Declines):

If the underlying asset price remains relatively stable and the premium declines to $2 per share, then:

Profit/Loss = $5 - $2 = $3 per share

Total profit = $300 per contract (1 contract = 100 shares)

Loss Scenario (Premium Increases):

If the price of the underlying asset moves in the opposite direction and the premium increases to $8 per share, then:

Profit/Loss = $5 - $8 = -$3 per share

Total loss = -$300 per contract (1 contract = 100 shares)

Buy To Close - Short Put

The profit or loss from Buy to Close - Short Put is calculated from the difference between the premium received at the beginning and the premium when the position is closed.

General formula

Premium received − Premium at Buy to Close

Example

You sell a Short Put contract and receive a premium of $10 per share.

Profit Scenario (Premium Decrease)

If the underlying asset price is stable or increases and the premium decreases to $4 per share, then:

Profit/Loss = $10 − $4 = $6 per share

Total profit = $600 per contract (1 contract = 100 shares)

Loss Scenario (Premium Increases)

If the underlying asset price falls close to or below the strike price and the premium increases to $15 per share, then:

Profit/Loss = $10 − $15 = −$5 per share

Total loss = −$500 per contract (1 contract = 100 shares)