What Is Sell to Close in Trading? | TrendSpider Learning Center (2024)

2 mins read

“Sell to close” is a trading strategy in which an investor sells a financial instrument, such as a stock, bond, or options contract, to close out an existing long position in the market. This strategy is used by investors who want to lock in a profit or limit their losses by selling a financial instrument they previously purchased.

Types of Sell to Close Trades

There are several types of “sell to close” trades in trading, including:

1. Closing a long stock position: An investor can “sell to close” their long position in a stock by selling the shares they own at the current market price. This is a way to realize a profit on the position.
2. Selling put options: If an investor has “sold to open” a put option position and the stock price has not fallen below the option’s strike price, they can “sell to close” the position by buying back the option at a lower price or letting it expire worthless. This allows them to realize a profit on the premium they received when selling the option.
3. Selling call options: If an investor has “sold to open” a call option position and the stock price has not risen above the option’s strike price, they can “sell to close” the position by buying back the option at a lower price or letting it expire worthless. This allows them to realize a profit on the premium they received when selling the option.
4. Closing a futures contract: If an investor has “sold to open” a futures contract position and the price of the underlying asset has declined, they can “sell to close” the position by buying back the contract at a lower price. This allows them to realize a profit on the position.

How to Sell to Close

Here are the steps involved in executing a “sell to close” trade:

1. Identify the financial instrument to sell: The first step is to identify the financial instrument that you want to sell to close out your existing long position.
2. Determine the price: Determine the price at which you want to sell the financial instrument. You can do this by reviewing market data and conducting technical and fundamental analysis.
3. Place the sell order: Place a “sell to close” order with your broker. This will instruct your broker to sell the financial instrument you have selected at the specified price.
4. Monitor the trade: Monitor the trade to ensure that your sell order is executed and that you receive the proceeds from the sale.

Once the “sell to close” trade is executed, the investor no longer holds a long position in the financial instrument, and they may have locked in a profit or limited their losses.

Sell to Close vs. Sell to Open

“Sell to close” involves closing out an existing long position by selling an asset the investor already owns, while “sell to open” involves opening a new short position by selling an asset the investor does not currently own.

The Bottom Line

Overall, “sell to close” is a common trading strategy used to manage risk and lock in profits. It’s important to remember that all trading involves risk, and investors should carefully consider their investment goals and risk tolerance before executing any trades.