Securities Trader Representative (Series 57) Practice Exam

What choice will eliminate a short position in a listed option?

1. Opening sale

2. Opening purchase

3. Closing sale

4. Closing purchase

The correct answer is: Closing purchase

To eliminate a short position in a listed option, a closing purchase is necessary. When an investor holds a short position in an option, they have sold that option without owning it, anticipating that the price will decrease so they can buy it back at a lower price. By executing a closing purchase, the investor is effectively buying back the option they initially sold short, which cancels out their obligation from the original sale. This transaction serves to fulfill the short position, thereby terminating any potential liability related to that position. The other options do not serve this purpose. An opening sale would establish a new short position, and an opening purchase would establish a long position, neither of which would close or eliminate a short position. A closing sale would refer to selling a long position, which also does not impact an existing short position directly. Thus, pursuing a closing purchase is the correct action to eliminate a short position in a listed option.