Why Buy To Close a PUT?

Options Trading Weekly or Monthly Options Put Option Strategy

If you read my posts about my 2023 goals, on January 17, 2023 I said I wanted a different strategic goal for options trading. I said, “The goal, then, will be to triple the number of cash covered puts on stocks that trade weekly options. The weekly part of this equation is important. I don’t want too much cash locked up for more than two weeks at a time.”

In 2022 I sold a cash covered put for 100 shares of SQM. SQM is a mining company called Sociedad Química y Minera de Chile S.A. This company is located in Chile, and it produces and distributes specialty plant nutrients, iodine and its derivatives, lithium and its derivatives, potassium chloride and sulfate, industrial chemicals, and other products and services.

I like that business and own 100 shares of SQM. However, SQM only trades monthly options. When I bought the put for SQM on January 11, I was effectively tying up $8,500 until February 17. This is certainly more than two weeks, so it no longer made sense to hold the SQM PUT. Furthermore, it is now highly unlikely that SQM will drop to $85, so there is an opportunity cost in keeping this put open. The good news is that I could buy an option to close the February 17 $85 PUT. That is what I did yesterday.

SQM is not a Troublesome Investment

With the exception of the monthly versus weekly options concern, I still like SQM as an investment. It pays a dividend, and the Equity Summary Score is solid. The earnings date is still a couple of months away, so there may be other opportunities to buy shares if earnings don’t meet investor and analyst expectations.

SQM is a good investment opportunity in my opinion.

How Do I Know Options Are Weekly or Monthly?

Because I use Fidelity’s Active Trader Pro software, I can quickly see the options frequency. When looking at a call or a put option, if you only see third Friday dates, you are looking at a stock or ETF that trades monthly options. In the following image you can see the third Friday dates for February, March, April, and June. I could have rolled the put from $85 to $90 if I thought the price would continue upwards. However, that still leaves me holding the PUT until the third Friday in February. So, while I would have added $180 in premium, I add to my risk as well. I don’t want to pay $9,000 for the shares.

SQM as seen in Fidelity’s Active Trader Pro shows monthly options.

Put Contract Details

If I hover over the “P” in the Trade Armor window, I can see that there are 25 days until my $85 PUT expires. My 2023 options trading goal is to keep future Put and Call trades at 3-10 days out. Therefore, I want to exit this trade.

SQM Put option is “Cash Covered” and expires Feb 17 in 25 days.

What Are My Odds if I Hold the Put?

The goal was to buy shares at $85. Because the trend has been up, it is now unlikely that SQM will drop to that price. The estimated “probability” SQM will be at or below $85 by February 17 is now only about 37%. That means it is unlikely that I will be able to buy SQM for my $8,500 cash that is on hold.

It is increasingly unlikely that I will be buying SQM for $85 per share.

“BPC” is Buy Put to Close

There is a cost associated with buying a put. In the screen below, you can see that my cost to get out of the contract is likely to be $1.90 per share, or $190. That cost liberates $8,500 in cash being held hostage by the monthly put (until February 17). However, since I first started trading SQM puts on December 5, 2022, I have a net gain of over $200, including the cost of buying this put to close.

However, I can enter a BPC Buy to Close order and pay around $190 to exit this Put Option.

The SQM Put is Closed

Someone was willing to take my $190 for the $85 put. This frees up cash for my next weekly option trade.

If SQM drops to $85 I will have wasted $190. But remember my new strategy. The strategy trumps the cost.

Summary

You don’t have to hold an option until expiration. If you change your mind or the market does something that you find distasteful, you can buy your way out of the contract. That is what I did with the PUT option for SQM.

Links for Learning

Investopedia has many helpful articles that explain many things about stocks, the stock market, ETFs and options trading. As you might imagine, they talk about “Buy To Close” and what it means to an option trader.

Buy to Close: Definition and How It Works in Options Trading – What Is Buy to Close?

“’Buy to close’ refers to terminology that traders, primarily option traders, use to exit an existing short position. In market parlance, it is understood to mean that the trader wants to close out an existing option trade. Technically speaking, it means that the trader wants to buy an asset to offset, or close, a short position in that same asset.”