A graphic used as the featured image that says buying to open and selling to close
Finance

Buying to Open and Selling to Close

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.

 

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