Options 101: Buy-to-Open
Buy-to-open is one of four different options transactions. When buying-to-open, either put or call options, the investor is initiating a new position.
For example, suppose I want to buy puts on Wells Fargo (WFC) because I expect the stock to fall. I instruct my broker to “buy-to-open” 10 WFC June 18 puts.
I was right! The stock falls from $20.60 to $17 and I want to “bank” a profit in my Wells Fargo puts. I then instruct my broker to “sell-to-close” my 10 WFC June 18 puts.
Sell-to-open is a way to initiate a short options positions. For example, I am bananas about Chaquita Brands (CQB) and I want to enter the June 7.5 covered call or “buy-write”. I instruct my broker to buy 100 CQB shares for $7.25 and sell-to-open 1 CQB June 7.5 call for $1.25. (Many brokers allow you to simply specificy a price, like CQB June 7.5 buy-write for $6. Nevertheless, when initiating a buy-write, the strategist is selling to open.)
I was wrong! CQB falls and I want to exit the trade. In order to do so, I tell my broker to sell 100 shares and “buy-to-close” 1 CQB June 7.5 call.
In sum, when trading options, orders are either opening or closing. When initiating a new long position in either puts or calls, the strategist buys-to-open and to offset the position and exit the trade, they “sell-to-close”. On the other hand, when creating a new short position, the strategist will “sell-to-open”. To exit the position, the strategist “buys-to-close.”
Category: Trading Education
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About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.
