Here’s one of those terminology fine points: When you close a short option
position,do you "Buy it back" or, more accurately, do you "buy to close?"
If this seems like splitting hairs (or is that splitting shares?) it may well be.
But when it comes to options, terminology should be very exact. If you
have an open short position and you place a "buy to close order," you are
not "buying it back." This phrase is seen all over the literature, but it is
misleading. To say you are buying something back implies that you once
owned the option, then sold it, and are now re-buying it. This is not the
sequence of events; short sellers never owned the option. It is an open
contract only because it was previously sold.
We options traders have to live by the words, "A little accuracy saves tons of
explanation." – Saki, (aka H.H.Munro)
About this week’s Heavy Hitter
Michael C. Thomsett is a widely published options author, with six options
books in print, published by John Wiley & Sons, FT Press, Amacom Books, and
Traders Library. He blogs at FT Press and The CBOE.
Michael C. Thomsett