What is Unwinding a Position?

Many times an option is not held until expiration, but is traded before expiration. Often too, a position, or leg of a position, becomes risky or unprofitable, and the trader or investor will want to make an adjustment by closing that position or a leg of that position. This is called unwinding.

The basic structure of unwinding a position is accomplished by using another position. For example, to close or unwind from a long call, you would sell a call. On the other hand, if you had opened a position by selling a call, to unwind from that position, you would buy the call back. The chart below demonstrates the actions that need to taken to unwind from an option position.