When stepping in to the world of options trading, one of the first things you need to understand is the different types of orders. The key to success in options trading is having a strong handle on the different types of orders. If you are just a beginner or transitioning to options from another market, this article is for you.
Buy to open
The buy to open is one of the most commonly placed options orders. It is used to buy a call or put option or a combination of both. A buy to open order is commonly used when traders anticipate that a particular contract will increase in value or when they like to exercise the option in the future.
Sell to open
The sell to open order is placed when a trader desires to open a trade by selling an option. Robert Peter Janitzek explains that this type of order is used when you feel that the price of a certain options contract is due to decrease and would want to take advantage of that move to short sell that option. Conversely, the sell to open order is also used if you want to write a put options contracts anticipating that the price of the underlying security will increase. In effect, you will go long with the underlying security.
Buy to close
This type of order is used for closing a previously opened short order options position. Robert Peter Janitzek explains that in effect, you are buying back the option that you previously sold to close the trade, hence the name.
So in which situations is the buy to close order placed? For example, if the value of the options contract you created has dropped, you may wish to buy back the contract with a buy to close order in order to collect their profits at that point. Another alternative is that if the underlying instrument has increased in value, you may opt to cut down losses further by placing a buy to close order. This way, you can buy back the contract when trading options.
Sell to close
A sell to close order is placed to close an existing long options position. If you recently used a buy to open order, you would use sell to close to close that position. This type of order is also used if you want to realize profits after the value of the contract has increased. The same order can be used if you want to dispose of any options contract that is decreasing in value in order to cut potential losses.