# Unwinding a Position: Definition, Process, and Common Uses

## What Is Unwinding a Position?

Unwinding a position involves closing complex or large trades in financial markets, often requiring multiple steps. It is also a strategy for correcting trading errors, such as broker mistakes. This article explores how unwinding works, when to apply it, and its significance in effective trade management.

### Key Takeaways

*   Unwinding involves closing complex or large trades, often through multiple steps or transactions.
*   The process of unwinding can also correct trading errors, such as executing unintended buy or sell actions.
*   Liquidity risk can complicate unwinding, as less liquid assets are harder to buy or sell.
*   Brokers are responsible for losses incurred when correcting trade errors through unwinding.

## Understanding the Unwinding Process

Unwinding is used to refer to the closing trades that require multiple steps, trades, or time. If an investor takes a [long](https://www.investopedia.com/terms/l/long.asp) position in stocks while at the same time selling [puts](https://www.investopedia.com/terms/p/put.asp) 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.

## Methods for Closing a Trading Position

Closing a position is the process required to eliminate a particular investment from a [portfolio](https://www.investopedia.com/terms/p/portfolio.asp). 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](https://www.investopedia.com/terms/s/short.asp), 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.

## Correcting Trade Errors Through Unwinding

If 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.

## Navigating Liquidity Risk When Unwinding

[Liquidity](https://www.investopedia.com/terms/l/liquidity.asp) 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.