Buy To Open
"Buy to open" is a term used by brokerages to represent the establishment of a new (opening) long call or put position in options. If a new options investor wants to buy a call or put, that investor should buy to open. A buy-to-open order indicates to market participants that the trader is establishing a new position rather than closing out an existing position. The sell to close order is used to exit a position taken with a buy-to-open order.Establishing a new short position is called sell to open, which would be closed out with a buy-to-close order. If a new options investor wants to sell a call or a put, that investor should sell to open.
Buy to Open
Definition
“Buy to Open” refers to the action of purchasing call or put options to establish a new position in the options market. This term is used to distinguish the creation of a new position from closing an existing one.
Origin
The concept of Buy to Open emerged with the development of the options market. While options trading dates back to the 17th-century Dutch tulip mania, the modern options market truly took shape after the Chicago Board Options Exchange (CBOE) was established in 1973.
Categories and Characteristics
Buy to Open primarily includes two types: buying call options and buying put options. Buying a call option means the investor expects the underlying asset's price to rise and pays a premium to gain the right to purchase the asset at a fixed price in the future. Buying a put option means the investor expects the underlying asset's price to fall and pays a premium to gain the right to sell the asset at a fixed price in the future.
Specific Cases
Case 1: Suppose Investor A expects a stock's price to rise. They buy a call option for 100 shares of the stock at a premium of $2 per share, with a strike price of $50. If the stock price rises to $60, Investor A can buy the stock at $50 and sell it at the market price of $60, making a profit.
Case 2: Investor B expects a stock's price to fall. They buy a put option for 100 shares of the stock at a premium of $3 per share, with a strike price of $40. If the stock price falls to $30, Investor B can sell the stock at $40 and buy it back at the market price of $30, making a profit.
Common Questions
1. What is the difference between Buy to Open and Sell to Open?
Buy to Open refers to purchasing options to establish a new position, while Sell to Open refers to selling options to establish a new short position.
2. What are the risks of Buy to Open?
The main risk of Buy to Open is the loss of the premium paid. If the market moves against the investor's expectations, they may lose the entire premium.
