What it means
Every open position is an exposure to price movement. Closing it converts that exposure into a settled cash outcome, which is why traders treat realised and unrealised profit as two quite different things.
The closing trade is always the mirror image of the opening one. Long positions are closed by selling, short positions by buying back, and futures by taking the offsetting contract so the two cancel at the clearing house.
Closing is not always all or nothing. Partial closes are common, where a trader sells half a holding to bank some profit and lets the rest run, reducing both the risk and the potential reward at the same time.
Tax and accounting hinge on the closing date rather than the opening one. A gain generally becomes taxable when the position is closed, which is why some investors deliberately close losing positions before a year end to set the loss against gains made elsewhere.
Positions do not always close voluntarily. A broker can close one for you if margin is not maintained, and a short seller can be forced to buy back when the stock lender recalls the shares, both of which tend to happen at the least convenient price.
In practice
Real-world examples.
Example
A treasurer hedged $5,000,000 of expected euro receipts with a forward contract. When the underlying customer contract is cancelled, the treasurer closes the position by entering an equal and opposite forward, crystallising a small loss rather than carrying an unwanted currency exposure.
Example
An investor holds a share that has doubled and is now 18% of the portfolio. Rather than closing the whole position, they sell half, recovering the original stake and leaving the remainder to run with no capital at risk.
Example
A trader is long 30 wheat futures on margin when prices fall sharply overnight. The account drops below the maintenance requirement, the funds are not wired in time, and the broker closes the position at the open, turning a paper loss into a realised one.
Formula
Calculation
Realised profit or loss on a long position = (closing price - opening price) x quantity - costs
Realised profit or loss on a short position = (opening price - closing price) x quantity - costs
An investor buys 500 shares at $32.40, an outlay of 500 x $32.40 = $16,200, and later closes the position by selling at $38.10 for 500 x $38.10 = $19,050. The gross gain is $19,050 - $16,200 = $2,850, which is the same as ($38.10 - $32.40) x 500.
Commission is $9.95 on each side, so total dealing costs are 2 x $9.95 = $19.90 and the realised gain is $2,850 - $19.90 = $2,830.10. Measured against the $16,200 committed, that is $2,830.10 / $16,200 = 17.5%.
A short position works in reverse. If the same investor had instead sold 200 shares short at $54.00 and closed by buying them back at $47.50, the realised gain would be ($54.00 - $47.50) x 200 = $1,300 before costs, and a rise to $60.00 rather than a fall would have produced a loss of ($54.00 - $60.00) x 200 = -$1,200.Case study
Seen in the real world.
The following is an illustrative and entirely fictional example. Bramfield Capital, an invented long and short equity fund, held a short position of 200,000 shares in a retailer at an average opening price of $54.00, on the view that its margins were about to be squeezed. The thesis worked and the shares fell to $47.50, giving an unrealised gain of ($54.00 - $47.50) x 200,000 = $1,300,000.
The portfolio manager decided to let the position run for another quarter rather than close it. Three weeks later an unexpected takeover approach lifted the shares to $60.00, and Bramfield's stock lender simultaneously recalled the borrowed shares, forcing the fund to buy back at the market. The realised outcome was ($54.00 - $60.00) x 200,000 = -$1,200,000, a swing of $2,500,000 from the unrealised gain of three weeks earlier.
In this fictional case the fund reviewed its rules and introduced a policy of closing at least half of any short position once it had captured 75% of the target move. The point was not that the original thesis was wrong; it was that an unrealised gain is not money until the position is closed.
Watch out
Common mistakes.
- Treating an unrealised gain as though it were cash, when nothing is certain until the closing trade is executed and settled.
- Forgetting that the closing side carries its own commission, spread and, on a short, borrowing costs that eat into the headline gain.
- Assuming a position can always be closed at the quoted price, when thin markets and gapping openings can make the exit far worse than expected.
Questions
People also ask.
What is the difference between closing a position and letting an option expire?
Closing means trading out of the contract before expiry, whereas expiry settles it automatically, and the two can produce different amounts once time value is considered.
Does closing a position always trigger tax?
In most systems a disposal creates a taxable event, though the treatment depends on the account type, the jurisdiction and whether the trade sits inside a tax-sheltered wrapper.
Can a position be closed with a different broker than the one it was opened with?
For shares usually yes, once the holding is transferred, but exchange-traded derivatives are normally closed within the account where the position sits.
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