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Buying to Open and Selling to Close
Opening an options position can involve buying an option (either a put or call) or selling an option (writing a put or call). As Investopedia adds – “a buy to open order indicates…that the trader is establishing a new position rather than closing out an existing position.” Conversely, the sell to close is indicative of an investor exiting (“closing out”) an existing position.
When selling to open a position, an investor would sell a call or put. In order to close this position, an investor would have to buy a call or put.
| Open a position by… | Close a position by… |
| Buy a call (right to buy shares @ exercise price – pay premium – will be long a call) | Sell a call (obligation to sell shares @exercise price – receive premium – will be short a call) |
| Buy a put (right to sell shares @ exercise price – pay premium – will be long a put) | Sell a put (obligation to buy shares @ exercise price – receive premium – will be short a put) |
| Sell a call (obligation to sell shares @exercise price – receive premium – will be short a call) | Buy a call (right to buy shares @ exercise price – pay premium – will be long a call) |
| Sell a put (obligation to buy shares @ exercise price – receive premium – will be short a put) | Buy a put (right to sell shares @ exercise price – pay premium – will be long a put) |
It’s important to note, as optionstrading.org points out, going long on an options contract (buying a call or put) means you think the value of the options contract will go up – so if you buy a call you hope to sell the call at a higher price (premium) in order to close the position and profit on the trade. If you buy a put, you hope to sell the put at a higher price (premium) to close the position. When buying a call or a put, you pay premium. In order to close the position and profit on the trade, you hope to sell the call or put and receive a higher premium.
When you go short an options contract (selling a call or put), an investor believes the value of the options contract will go down. So if you sell a call you hope to buy the call at a lower price (premium) in order to close the position and profit on the trade. If you sell a put, you hope to buy the put at a lower price (premium) to close the position and profit on the trade. When selling a call or put, you receive premium. In order to close the position and profit on the trade, you hope to buy the call or but for less premium.
A sell to close order, according to optionstrading.org is really “quite simple. It’s basically the order to sell options contracts that you already own” either to realize a profit (sell higher) or to cut losses.