What Does "Buy to Open" Mean?
A "buy to open" order is one placed by an investor on an options contract that essentially gives them ownership of the contract. This is one way to open a position on options, with the opposite being a "sell to open" strategy. By buying to open, the investor is taking a long position on the underlying instrument, and may exercise the option on the contract if the price of the instrument reaches the strike price. It is important to note that a "buy to open" order may include either the option to buy the underlying asset, known as a call option, or the option to sell the asset, known as a put option.
Options are effective ways for investors to speculate on the price movement on certain assets like stocks without actually gaining physical ownership of those assets. For novice investors, the terminology involved with options can be difficult to understand. There are several different maneuvers that an investor can make in trading options, but, for an opening position, he or she can only either buy to open, which is a long position, or sell to open, which is a short position.
When investors choose to buy to open, they must choose between two types of options. A call option gives them the opportunity to buy some underlying asset at a set price known as the strike price at some point before the options contract expires. By contrast, a put option gives them the right to sell that underlying asset in the future.
Put options may cause some confusion for those who wish to buy to open. Even though the option is purchased, the investor is hoping that the asset drops in price, since that would mean that a profit could be gained. It is important to understand that buying a put option is a long position. Short positions are taken when an investor sells to open, which means they are selling call or put options to those wishing to go long.
Once a person decides to buy to open, there are essentially three ways things can turn out. If the price of the underlying asset doesn't reach the strike price before the contract expires, the contract is worthless and the investor takes the loss of the premium paid to buy the option. When the strike price is reached, the investor may exercise the option and buy the amount of the underlying asset stipulated by the contract. One final outcome would be for the investor to close out the contract by selling, a process known as a "sell to close."
Discuss this Article
Post your comments