What Is Buy to Open in Options Trading?

“Buy to open” is something you’ll do a lot in options trading. It’s one of the most basic things you have to learn as an options trader.

There are no shortcuts in trading — that goes double with your knowledge account.

What does buy to open mean, and how does it work in practice? I’ve got you covered. Read on to learn more about buying to open in options trading!

What Is “Buy to Open”?

“Buy to open” means opening a long call or put position.

Options brokerage firms use this term when a trader wants to buy a call or put. When a trader buys to open, they start a new position instead of closing an existing one.

There’s no simple “buy” or “sell” order like with stocks. You choose between four orders in options trading:

1. Buy to open
2. Buy to close
3. Sell to open
4. Sell to close

“Sell to close” is the opposite of a buy-to-open order. When you sell to close, you exit the position by selling the contract to another trader.

How Does It Work?

Buy to open works by letting you buy an options contract.

Let’s say you’re submitting a buy-to-open order for a put option on Company X’s stock. If the order goes through, you have the right to sell Company X’s stock at an agreed-upon strike price.

Finishing a buy-to-open order means you’ve opened a position. An open position means the option holder can potentially profit from stock price movements.

An open position eventually needs to be closed. There are three ways your open position closes:

1. You exercise the option. You can profit from the difference between the current market price and the strike price.
2. You let the option contract expire. Sometimes, the current market price doesn’t hit the strike price at expiration. If that happens, you can just let the contract expire without losing more money.
3. You submit a sell-to-close order. This means you’re selling the contract to somebody else. Options closer to expiration are usually worth less because of time decay.

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You can use a stop-loss order to limit your options trading losses. Read my post about when to use stop-loss orders to learn more.

Real-Life Example of a Buy-to-Open Position

Still trying to understand how buy-to-open orders work? Here’s an illustration:

Let’s say Company Y’s stock price is currently $20 per share. You expect it to rise within a few months, so you buy to open a call…

In the order, you buy five call options at a strike price of $25. Each call option usually lets you trade 100 shares of the underlying security. So, if you buy five calls, you’ll have the option to trade 500 shares at the given strike price.

If Company Y’s stock moves beyond $25 before it expires, the option becomes executable. You can exercise your call options and buy 500 shares of Company Y’s stock at $25 each. You can also sell the option before its expiration.

Your options may never hit the strike price, or sag back under the strike price. In these cases you don’t have to do anything — option agreements are rights, not obligations. The only money you’ll lose by letting options expire are the premiums (which can be a lot!).

Buy to Open vs Buy to Close

You’ll buy to open often when you’re an options buyer. It’s a big part of the options trading puzzle.

So what is “buy-to-close?”

Things work in reverse in short options positions. You sell to open and buy to close.

Here’s an explanation of the two short options position terms:

• Sell to open: This is how you describe opening a short position by selling an option to another trader. You receive a premium when somebody buys the option.

• Buy to close: This is when you close your short position by buying an option for the same asset you sold an option for.

Buy-to-close and sell-to-open orders are mostly for option sellers — aka, options writers. This is a strategy where you profit from giving other traders the right to exercise options, in return for the cost of a premium.

What Is Sell to Open in Options Trading?

“Sell to open” in options trading is a way to open a short position. You do this by writing an option for another trader to buy. You’ll receive a premium when somebody buys the option contract you sell.

Here’s an illustration of how sell-to-open orders work:

Let’s say you think Company Y’s stock price will fall in the coming months. At the same time, other traders expect share prices to rise. You can sell to open a call option.

A trader who expects share prices to rise will buy your call option. They’ll also pay you the option contract premium.

However — you’re on the hook to fulfill that option if it becomes executable. You don’t have the option of not exercising the option.

Like shorting, there’s more risk when selling to open because you have unlimited loss potential. Your profits are also limited to whatever premium you receive from the contracts.

It's dangerous to be a short seller these days, I greatly prefer riding the bull 🙂 pic.twitter.com/xci59isbAw

— Timothy Sykes (@timothysykes) August 28, 2019

Because of the unlimited loss potential, options sellers who are writing uncovered options must have qualified for higher levels of options access. Newbies can write covered options — all they’re on the hook for is the transfer of the stocks they already own.

Your options broker has to trust you when you trade higher level options… but you should trust them too. If you’re lost, check out my article on finding the best options broker. You can also check my posts about options trading on Interactive Brokers and on Schwab.

Key Takeaways

Buy-to-open orders are one of the most basic moves in options trading. You submit a buy-to-open order to open an options position. Then you can exit the position. You do this by exercising the option, letting it expire, or “selling to close” — selling the option to another trader.

“Buy to open” and other order types are just some of the basic trading lingo you should learn before trading options.

Here are some more key tips to follow in options trading:

• Don’t copy other traders’ picks.
• Study strategies and chart patterns.
• Make your own stock watchlists.
• Trade with a plan, and follow your plan.
• Record your option trades for future review.
• Evaluate your results and refine your approach.

Trading is one of the hardest things you’ll ever learn. But learning to trade options from pros helps you bypass much of the early trial and error.

I don’t trade options — I leave it to pros like tech entrepreneur and trader Ben Sturgill. His smart-money webinars are the product of more than 2 decades of experience in the market and a unique technology, and they’re well worth checking out.

Check out the webinar here to see why Ben’s smart-money scanner has been going haywire lately!