Sell to Open vs. Buy to Open

If you’re new to trading options or even if you are experienced, executing an option order can be a bit confusing if you don’t know exactly what order to execute.

 

When trading options (calls or puts) you really only have two choices when placing an order; you can either open a position or close a position. For now we will discuss how you can open a trade.

 

If you are curious about closing a trade you can read more about it here.

 

After selecting which security you wish to trade and it’s corresponding option, you are presented with two ways in which to open that trade: ‘Sell to open’ or ‘Buy to open’.

 

You want to select buy to open when you are going long on an option. When going long on either a call or put option you don’t need any stock or funds to back up the position. You are buying the option to open the position. This is the order entry that many people are used to and start out with when first investing with or trading options.

 

If you sell to open a position you are basically selling short or ‘writing’ an option to open the trade. To sell an option to establish a position you need either the corresponding stock shares or their cash equivalent as collateral for the position.

 

If you don’t have the stock to back up your ‘sell to open’ order you are shorting the option or selling a ‘naked position’. If you have the shares to back up the  ‘sell to open’ trade then you are selling a ‘covered position’. This is the basis of our strategy focus here, writing covered calls. We use the ‘sell to open’ order when selling covered calls.

 

Make sure to choose your type of entry order wisely. With one mistaken click of the mouse you could lose a great deal of money, simply by not knowing which order type to use.

                                                                   

Make sure you always pick the best stocks.

Download my free cheat sheet and never get stuck with a bad stock again.

Find Out How

                                                   

3 Comments

  1. DILIPKUMAR KAPASI

    Please clarify if my understanding is CORRECT per below for STO and BTO. I placed a trade STO stockX at 297.5 along with BTO at 295 on same future date. The difference of 0.40 was credited to my account per 1 contract.

    EXPLAIN what the above means..please.

    • Anthony Pietroske

      The order that you created was that you shorted stock X at 297.50. Basically, you sold one share at 297.50 and you then created a contingent order to buy it back at 295.00. Once the first order, the order to sell the stock (sto= sell to open) was executed, it then made your second order possible. I don’t know what kind of order you initiated, whether it was a limit or market order. The difference between the two prices is 2.50 so I’m not sure how you were credited only .40.

      • Anthony Pietroske

        The second order could not be BTO as that would be to open the position. Buy To Open. If it was closing out the position then it would be BTC, Buy to Close. Now if these are options you’re talking about, it seems you may have placed a spread options trade.

Leave a Reply

Your email address will not be published. Required fields are marked *