Buy To Open Vs Buy To Close

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An option is a contract between two parties for the right, but not the obligation to buy or sell a certain amount of an underlying asset, at an agreed-upon price (the strike price), by an agreed-upon date (the expiration date).

Like stocks, an options trader can decide to go long (betting on the price rising) or short (betting on the price falling).

Since options involve the use of contracts between two parties that can be subsequently traded on a market, there are two different ways that an options trader can decide to enter into a position.

These are:

  • Buying or selling a completely new options contract
  • Buying or selling an options contract that already exists

This gives an options trader flexibility and further considerations when entering a position, opening up the number of potential options they can trade with.

There are four ways to enter a trade, which are the:

  • Buy To Open
  • Buy To Close
  • Sell To Open
  • Sell To Close

This article will explore the ways in which a trader can buy an options contract, and so it will cover the two order types that permit this – the Buy To Open and The Buy To Close.

A future article will explore ways in which a trader can sell an options contract, covering Sell To Open and Sell To Close order types.

Buy To Open 

A Buy To Open is one of two possible ways that an option position can be opened (the other is the Sell To Open).

A Buy To Open is used when a trader wants to go long the option – that is to say, they believe the value of the option will increase.

When executing a Buy To Open, a trader is creating a new options contract in the market.

With this type of order, the cost of the option (called the premium) is debited from the trading account and the trader is awarded with a long position in the market.

A Buy To Open can be used to buy both a call and a put and it works in the same way for both.

When a Buy To Open is used for a call position, it means the trader is hoping for the price of the underlying stock to rise, which increases the value of the call option.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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