Showing posts with label buy to close (BTC). Show all posts
Showing posts with label buy to close (BTC). Show all posts

Saturday, 19 April 2014

NYSE&NASDAQ: What is buy to open, buy to close, sell to open and sell to close?

When you are on your first time to trade options, you may be baffled by the choice of transactions:

buy to open (BTO), sell to close (STC), sell to open (STO), buy to close (BTC)

First time seeing this: what the heck are these? How come buying something can close something (buy to close)? How come selling something is to open something (sell to open)?

In stock transactions, there is only buy and sell, which is already self-explaining. But for options, because you have the right to buy or sell, every time when you want to OPEN a position, you need to choose if you were to OPEN a BUY or SELL position, i.e. buy/sell refers to the transaction you would like to make, whereas open/close refers to your position, whether you would like to open or close your position.

Assuming that currently you do not hold any open position (i.e. do not hold any options):

i) when you want to buy a call or put options, you choose BUY TO OPEN. When your transaction is matched, then you will have an open position. This open position will then required to be closed on or before expiration, e.g. if you wish to close earlier, then you choose SELL TO CLOSE, since you are SELLING your options and at the same time CLOSING the position.

ii) when you are selling a call or put options, you choose SELL TO OPEN. Then you will have a some kind of equivalent "short" position, e.g. when you sell 10 contracts, you will have -10 contracts for that options. You will then require to CLOSE the position by BUYING back, i.e. BUY TO CLOSE.

In short, if you were to commence a new trade, and you wish to be the buyer, then you choose BUY TO OPEN. Otherwise, if you want to be a seller, then you choose SELL TO OPEN. 

Hope this thread will clear the doubts of many options beginners, as I was also confused by these terms at first.