I'm trying to learn about options and when I log into my bank's online trading site I see the following selections in the menu.
Can anyone explain what each of them mean and how they're different from each other?
Can anyone explain what each of them mean and how they're different from each other?
- Buy To Open
When you "buy to open", you are purchasing an option and opening a new position.
- Sell To Open Covered
When you "sell to open", you are creating a brand new options contract and selling it. "Covered" means that you have assets in your account to satisfy the terms of the options contract. A "covered call" is a call option for which you own shares of the underlying stock that you will sell to the buyer at the option's strike price if he exercises the option.
- Buy To Close
If you previously made a "sell to open" trade to create a new position, and you want to close the position, you can buy back the option.
- Sell To Close
If you previously made a "buy to open" trade, you can "sell to close" which will sell back your option and close your position.
In summary:
With stocks, you can buy or sell. If you sell first, that's called 'shorting.' As in "I think linkedin is too high, I'm going to short it."
With options, the terminology is different, the normal process is to buy to open/sell to close, but if you were shorting the option itself, you would first sell to open, i.e you are selling a position to start it, effectively selling it short. Eventually, you may close it out, by buying to close.
Options trading is not for the amateur. If you plan to trade, study first and be very cautious.
The two dimensions are to open the trade (creating a position) and to buy or sell (becoming long or short the option).
If you already own an option, you bought it to open and then you would sell it to close.
If you don't own an option, you can either buy it to open, or sell it (short it) to open.
If you are already short an option, you can buy it back to close.
If you sell to open covered, the point is you're creating a "covered call" which means you own the stock, and then sell a call. Since you own the stock, the covered call has a lot of the risk of loss removed, though it also subtracts much of the reward possible from your stock.
