Important Terminology to Know When Trading Options

When it comes to trading an option, whether it be a call or a put one doesn’t just buy it and sell it.

Trading Stock, yes, one DOES simply just buy the stock to then be able to sell the stock.

When one goes to place an order on their broker trading platform they will see different line-item choice for executing their options orders.

Instead of seeing just a Buy or a Sell line-item choice, they will likely see choices on their order screen such as Buy–to-Open, Buy-to-Close or Sell-to-Open, Sell-to-Close

What do those mean and what does one choose?

Because an option is a contract that gives one the right to do something with that stock on or before a specific date (expiration date), one can look at it like they are opening up an agreement to ‘maybe’ do something with the stock later.

That ‘maybe’ is exercise their right to either buy or sell the stock at a later time.

One is ‘opening up’ an agreement to maybe do something later or not. When one wants to end that agreement and decide to sell the option or no longer have the right to do something with that stock they would ‘end’ that agreement and that is what is called ‘Closing or they will Close’ the contract.

When one is buying an option they would place a “Buy-to-Open” order.

Example: Buy to Open an XYZ February 21, 2025, $40 Call option.

His means one I buying to open a Call option contract which gives them the right to buy XYZ stock at $40 anytime between when they bought the option to open or expiration date.

If one wants to end that contract and no longer keep the right to buy the stock at $40 by expiration they can, “Sell-to-Close” that option contract.

Sell-to-Close the same XYZ February 21, 2025, $40 call at whatever current market price the option is trading for at the time they want to get out of it prior to the expiration date.

This ends he trade in that the option contract is considered closed and the purchaser no longer has the right to do anything with the stock.

Whether the end result is they traded this option for profit or loss is not the key to this education, but yes, one does want to ‘Buy-to-Open’ and ‘Sell-to-Close’ that same option and same number of contracts for each side of the transaction for profit.

The reverse can be done as well. One can “Sell-to-Open” and then “Buy-to-Close” an option.

The difference is because one is first selling to open a call option, for example, they are selling the markets the “right to buy the stock” from them. When one wants to end or take away the markets rights they would “Buy-to-Close” that same option and the same number of contracts to “Close” the trade.

Buy–to-Open: One is buying the option and has the right to buy or sell the stock by the expiration date.

Sell-to-Close: One is selling the option contract (same expiration and same number of contracts) they originally Bought to Open in order to end the trade.

Sell-to-Open: One is selling to the markets the right to buy or sell the stock from them.

Buy-to-Close: One is buying the option contract (same expiration and same number of contracts) they originally Sold to Open in order to end the trade.

Get familiar with your brokers trading platform as these order types would be listed the same way across all platforms, but in the event your broker has it programmed to look lightly different you want to know what it looks like so you can properly enter your trades the right way.

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