Options trading: buy/sell to open/close terminology

Question

I want to buy put options as I believe the price of the underlying asset is going down. In the linked video here at around 1:10 there is a bit saying that for short positions, you 'sell to open' to enter and 'buy to close' to exit, while for long positions you buy to open and sell to close. But then at the bottom of the page they state

The phrase "buy to open" refers to a trader buying either a put or call option, while "sell to open" refers to the trader writing, or selling, a put or call option. "Sell to close" is when the option holder, the original buyer of the option, closes out either a call or put. "Buy to close" means the option writer is closing out the put or call option they sold.

So 1. if I want to buy a put option which is it - buy to open or sell to open ?

and 2. if I've 'sold to open' puts (which, I believe, means I've sold put options, and would thus be liable to buy the underlying asset at strike price from the put buyer if he exercises, and thus this is a long position - a bet that price goes up) , how do i 'get out' of the position - buy to close?

Answer 1

When you establish a new option position it is either:

• Buy to Open (BTO) or Sell To Open (STO)

When you close an existing option position it is either:

• Buy To Close (BTC) or Sell To Close (STC)

A closing position cancels an opening position. In other words:

• BTO + STC = no position
• STO + BTC = no position

So if you sell to open a put and it is assigned (the put owner exercises it), then yes, you will have to buy the underlying asset at strike price (you now own a long position). Buy to close before assignment is the only way out of the contract unless the contract expires worthless.

Answer 2

@BobBaerker's answer addresses your key questions and it got my +1 vote.

However, since your question specifically pertains to terminology, I would like to add my pedantic two cents' worth to address confusion surrounding the terms "long" and "short" as they relate to option contracts:

• If you buy to open an option contract, then you're long the contract — whether a put or a call.

  similarly...

• If you sell to open (write) an option contract, then you're short the contract — whether a put or a call.

So, characterizing the writing of put contracts as "this is a long position" as in your #2 is incorrect. If you sold to open some puts, you unequivocally established a short position in the puts. Your portfolio would show a negative quantity of puts until one of: (a) you buy to close enough same puts to cover the short position, (b) the puts expire worthless, or (c) the holder exercises the puts and you're sold/put the underlying shares at the strike price.

I suggest not using "long" and "short" to describe how your overall financial position may or may not benefit based on price movements in the underlying. In the put writing example, yes it is true you'll have profited by capturing premium if, by expiration, the price of the underlying rises above or remains above the strike price for the puts you wrote (and you were not assigned early).

However, such profit from put writing does not make a short put similar to a long position in the underlying! If you actually had a long position in the underlying, your upside would be unlimited — while the most you can make from a short put is the premium received.

I prefer the terms "neutral", "bullish", and "bearish" (and sometimes with a "weak" or "strong" modifier) to describe the kind of bet I'm making with any particular option strategy, with respect to the underlying. I use "long" and "short" to strictly describe whether I have a positive or negative quantity of a security.