SIE Question - help

FINRA
1

Hi There! I am having a hard time understanding what this question is asking. Could someone please help interpret this?

“A transaction in which a writer covers a position by purchasing an option is called”
A) a closing sale
B) a closing purchase
C) an opening sale
D) an opening purchase

Correct Answer is B. I understood this as an investor (writer) has an outstanding and buys an option to hedge it, therefore, I deduced an opening purchase should be the transaction related to the option. Where did I make a mistake?

Thank you in advance!

2

Hi, it’s best to think of this in two parts:

  • Opening vs closing
  • Purchase vs sale

Opening vs closing

  • If the investor currently is starting a new position, then they make an opening transaction
  • If the investor currently is ending an existing position, then they make a closing transaction

Purchase vs sale

  • If the investor wants to buy the option, they make a purchase to go long
  • If the investor wants to sell the option, they make a sale to go short

In this situation, the investor is closing an existing position by purchasing an option.

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