Buy To Open, Sell To Close, Sell To Open, Buy To Close

In stock and option trading, there are multiple ways to establish a position in the market.

But there are only two ways to enter any particular order into the market- either long or short.  In this article, we’ll discuss how different buy/sell orders establish a market position in a theoretical option trade.

Buy to open – sell to close

When a trader is going long an option, a buy to open order is used.  When an option is bought, the cost of the option is debited (taken away) from the trading account.

In other words, the trader is buying the option to establish a position in the market.  This works the same for both calls and puts.  Buying to open a call position means the trader wants the stock price to rise so the option makes money.

On the other hand, when a buy to open order is established on a put, it means the trader wants the stock price to fall so the option goes up in value.

Whenever a buy to open order is used, a sell to close order must be used to exit the position.

Sell to open – buy to close

If a trader wants to short an option, he/she would use a sell to open order.  When a sell to open order is used on an option, a credit is applied to the traders account.  This works the same for both calls and puts.

The only way to unwind a sell to open order is with a buy to close order.  In other words, the sold option is bought back.

In option trading, there many different strategies that work in different market environments.  All strategies require some form of trade entry, which could be buy to open, sell to close, sell to open, buy to close, or combinations of all.

Category: Options Trading Basics