Closing an existing options position, usually a multi-leg one, by trading the opposite package rather than letting it expire.
Unwinding is the deliberate exit. You buy back what you sold and sell what you bought, ideally as one spread-order so the net price is what you control.
The reason to unwind rather than hold to expiration is pin-risk and early-assignment. Paying $0.05 to close a short leg that is nearly worthless removes a weekend of uncertainty for $5 per contract, which is almost always a good trade.
Example: your XYZ $45/$50 put spread was sold for $1.60 and now trades at $0.15 with three days left. Unwinding captures $1.45 of the $1.60 immediately and frees the buying-power-reduction. Holding for the last $15 per spread risks a gap that costs $500.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
Educational only, not advice. Spotted an error? Post in Site Feedback.