Closing a Short Option by Buying It Back at a Five-Cent Price

Summary

The document explains the options phrase “buy back a short strike” as purchasing an option previously sold, thereby closing that short position. The example describes placing an order to buy it back for five cents per contract, with a good-till-canceled order entered when the trade is opened. This is presented as a personal rule for exiting short options after their value falls substantially, intended to avoid leaving a small residual position open until expiration or a possible reversal.

The post also cautions that defined-risk strategies can still lose the full amount at risk, and that deciding when to exit a trade is difficult: holding or closing can each look wrong in hindsight. It offers no performance data or analysis showing that the five-cent threshold is generally effective. The threshold is an individual practice, and the document does not specify how contract multipliers, fees, liquidity, or different option structures affect the order.

Key ideas

• Buying back a short option means purchasing an option previously sold to close the position.
• A five-cent buyback order can be entered as a good-till-canceled order when opening the trade.
• The stated exit rule is a personal practice rather than a demonstrated universal threshold.
• Defined risk does not prevent a trade from losing the full amount at risk.

Tags

# What does buying back a "short strike" for .05 mean?


# What does buying back a "short strike" for .05 mean?












What does the red phrase below mean?

> doougle. 7 points 3 years ago. This is one of the "not as easy as it sounds" things about options. You always hear things like "Make money if the market goes up down or sideways" or "defined risk trade with an 80% probability". Well, that risk is defined, and it's usually all of your money. They never tell you that part. Anyway, I think we all struggle with this part. It's hard to have an across the board rule because every trade is a little different. I've let trades go and had them go max loss. I've bailed and seen that it would have recovered. So I do things to try to stay away from the zone that forces such a decision. For example, $\color{red}{\text{any short strike, no mat[t]er what type of trade, I buy back for .05.}}$ (I put in a GTC order as soon as I put the trade on) This alone has saved me thousands.

## Answer by river_rat (score 1, accepted)

https://quant.stackexchange.com/a/54175

To buy back a short strike is to buy back an option you have sold to the market, thus closing out the position. In this case it would be putting a bid at 5c per contract.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.