A “buy to open” order is an investor’s way of taking ownership of an options contract, allowing them to take a long position in the underlying asset. Options can be confusing, but investors can only buy to open or sell to open. A call option allows the investor to buy the asset at a set price, while a put option gives them the right to sell it in the future. If the asset doesn’t reach the strike price, the contract is worthless, but if it does, the investor can exercise the option or sell to close.
A “buy to open” order is one placed by an investor in an options contract that essentially gives them ownership of the contract. This is one way to open a position in options, otherwise it is a “sell to open” strategy. By buying to open, the investor takes a long position in the underlying instrument and can 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 can include 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 of certain assets, such as stocks, without actually gaining physical ownership of those assets. For novice investors, option terminology can be difficult to understand. There are several different moves that an investor can make on trading options, but, for an open position, they can only 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 can cause some confusion for those wishing to buy to open. Even though the option is bought, the investor expects the asset to fall in price, as that would mean a profit could be made. 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 that he is selling call or put options to those who want to go long.
Once a person decides to buy to open, there are essentially three ways that things can play out. If the price of the underlying asset does not reach the strike price before the contract expires, the contract is worthless and the investor takes the loss of the premium paid to purchase the option. When the strike price is reached, the investor can exercise the option and purchase the amount of the underlying asset stipulated by the contract. An end result would be for the investor to close out the contract by selling, a process known as “sell to close.”
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