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.”