how unwinding works
unwinding is used to refer to the closing trades that require multiple steps trades or time if an investor takes a long position in stocks while at the same time selling puts on the same issue they will need to unwind those trades at some point this entails covering the options and selling the underlying stock a similar process would be followed by a broker attempting to correct a buying or selling error unwinding is a process of reversing or closing a trade by participating in an offsetting transaction closing a positionclosing a position is the process required to eliminate a particular investment from a portfolio in the case of securities when an investor wants to close the position the most common action is to sell the security in the case of shorts an investor would need to buy the short shares back to close the position the term unwinding is more likely to be used when buying or selling occurs over multiple transactions and not just one unwinding is a process unwinding to correct trade errorsif a broker accidentally performs an incorrect action with an investor s funds such as buying more of a particular security when the instruction was to sell it the broker must resell the security that was accidentally purchased to correct the error they must then make the original sale requested if the broker experiences a loss during this error correction process the broker is responsible for the difference not the investor other activities that can be considered a trade error include buying or selling a security other than the one specified buying or selling the incorrect quantity of a security or trading in prohibited securities errors that are caught prior to being fully processed and that are successfully canceled do not require unwinding unwinding and liquidity riskliquidity risk can have negative effects on an investor s or a broker s ability to unwind a transaction liquidity refers to the ease at which a particular asset can be bought or sold if an asset is less liquid it is more challenging to find an appropriate buyer or seller so the liquidity risk is elevated regardless of whether a transaction was completed intentionally or accidentally all risks associated with the particular security still apply when attempting to unwind it 