The 4 Basic Types of Options Trades

Mark Wolfinger

Posted on Fri 4th Sep, 2009 02:41:50 PM

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When you trade options, there are four ways in which each trade can be described:

Buy to Open

A. An order to buy a specific option
B. You are initiating a new position, or increasing an existing position

Buy to Close

A. An order to buy a specific option
B. You are buying an option that you previously sold
C. You are reducing or exiting (closing) an existing position

Sell to Open

A. An order to sell a specific option
B. You are writing (selling) an option you do not own
C. You are initiating a new position, or increasing an existing position

Sell to Close

A. An order to sell a specific option
B. You are selling an option you bought earlier
C. You are reducing or exiting an existing position

Some brokers require that you specify into which of the four categories your trade falls. Others don’t ask because it’s a simple matter for their computers to gather the information.

When you trade spread, or combination orders, you are entering an order to trade at least two different options simultaneously. The same rules apply. When you initiate the trade, the appropriate boxes to check are: ‘Buy to open’ for the option you buy and ‘sell to open’ for the option you sell.

Some beginners get stuck when entering an order because they have not yet learned which of these four choices applies to a specific order. The purpose of this post is to be certain that you don’t have to be bothered with this annoying request from your broker.

Mark Wolfinger is a 20 year CBOE options veteran and is the writer for the blog Options for Rookies. He also is the author of the book, The Rookie’s Guide to Options.

Further Reading, Options Trading: