06) Order Actions

by · January 6, 2015

In this lesson, we will be taking a look at the different types of order actions.  If you’re new to options trading, these can be a bit confusing at first, but I assure you it’s a rather straightforward concept and you should up able to pick it up rather quickly.

The 4 order actions we’ll be looking at are…

  1. Buy to Open
  2. Buy to Close
  3. Sell to Open
  4. Sell to Close

 

Buy to Open

A “Buy to Open” order is the most common way to start a new options trade.  It means that you are BUYing contracts to OPEN a new options trade.

If you are familiar with stock trading, this is virtually the same as a “BUY” order for purchasing shares of stock.  You would Buy to Open contracts you wish to INCREASE in price.

 

Buy to Close

Next up, the “Buy to Close” is an order type that would be used to BUY to cover contracts that you are short and therefore be CLOSING your “short”.  So, that means when you OPENed this trade, you used the order type “Sell to Open”.

If you are familiar with stock trading this is about the same as “Buy to Cover”.

Sell to Open

So, let’s look at the “Sell to Open” order type.  Like I was saying this is opening a new short position.  You are SELLing option contracts to OPEN a new position.  This would result in you having a negative amount of contracts.  In stock trading this would be called “short selling”.  You would Sell to Open contracts you believe to DECREASE in price.

Sell to Close

And, finally there’s the “Sell to Close” order, which is the most common “closing” order type.  After you have acquired contracts via the “Buy to Open” order type, you SELL those contracts to CLOSE that position.
With stock trading, this is simply called a “SELL” order.