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What Is Buy to Open in Options Trading?

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Written by Timothy Sykes
Reviewed by Friedrich Odermann Fact-checked by Ed Weinberg
Updated 5/10/2024 8 min read

“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”?

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“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.

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

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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?

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“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.

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 TD Ameritrade.

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 Spyder 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!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”