Square Off: Understand How to Close Your Option Positions

Square off is an intraday trading strategy that involves closing all open positions by the end of the trading day. Intraday trading, also known as day trading, in all markets requires traders not to carry their open positions to the next day. Similarly, option intraday traders also close their positions by the end of the day. In other words, if you buy an option, you have to sell and vice versa before the market closes in the evening.

Why do intraday traders or day traders square off? Obviously, traders do that because intraday trading involves closing all open positions by the end of the trading day. However, this isn’t an easy endeavor. Squaring off a position to make a profit is a strategy you need to understand first. Fortunately, we are going to explain this in this article. So, don’t go anywhere and keep reading. 

Square off definition

Square off is an intraday options trading strategy that involves buying or selling options and then subsequently reversing that transaction by the end of the trading day in the hopes of making profits. 

Explanation

Square off is a simple strategy that revolves around making a profit by opening and closing an option position within a day. In simple trading, squaring off means if you buy, you have to sell and if you sell, you have to buy by the end of the day. In options trading, closing an open position means taking a position this is the exact opposite of the opened position. For instance, if you buy a call option, you have to sell a put option with the same underlying security, strike price, and expiration date. In the simplest words, you have to reverse the open position for squaring off. 

As you know, the expiry date of an option contract is the date on which the contract expires. So, if you don’t close your open position by the end of the day on the expiry date, there are two possibilities. You will either have to buy underlying security or sell it and that can prove costly. Therefore, it is important to square off your position. Furthermore, intraday trading can be profitable for you and you also have to invest for just a day. However, day trading is also expensive because you have to pay heavy brokerage fees.

What happens when you don’t square off an opened option position

As you know, any option contract has an expiry date and therefore, the contract exists for a certain period of time. That means the buyer and seller of an option contract settle the contract upon expiry. The settlement between both parties can be done through physical delivery or cash settlement. Physical delivery involves the physical delivery of the underlying security by the seller to the buyer of the contract. Contrarily, cash settlement involves the settlement through cash equal to the difference between the strike price and the spot price.

However, if you don’t square off before expiry, the exchange demands you to replenish the margin amount. If you do that, you can carry the position. However, if you choose to square off your position, you have to sell the same lot of options you had bought or vice versa. As the secondary market’s spot price of an underlying security affects the value of an option contract, all option contract settlement value is decided by the spot price at the end of the previous day.

The wrap-up

Square off means traders have to close their position by the end of a trading day if they are day trading. Squaring off a position means reversing your open position. In simple trading, it involves buying if the opened position is selling and selling if an opened position is buying. Whereas in options trading, the objective is to reverse the position – if you buy a call option, you have to sell a put option with the same underlying security, strike price, and expiration date, and vice versa.