I have read that there are three scenarios when it comes to closing an option:
You can buy or sell to “close” the position prior to expiration.
The options expire out-of-the-money and worthless, so you do nothing.
The options expire in-the-money, usually resulting in a trade of the underlying stock if the option is exercised.
I understand 2 and 3 but have a question about #1. When I buy a call option for example, I am buying from someone who is selling/writing the contract. Similarly, when I sell to "close" a contract, someone has to buy the contract from me.
I read that from Robinhood that if the contract is about to expire and is out of the money, they will automatically sell it back in the market so I don't lose all of it. However, here comes my question, if my contract is about to expire in an hour, who would and why would someone goes and buys my contract which probably does not worth very much? And if that person decides to exercise that contract, wouldn't it just be cheaper to buy the 100 shares directly? Am I understanding this correctly? Thanks!