There are two main ways an investor may participate in the options market:
1) He or she can buy an option.
2) He or she can write an option (sometimes referred to as "selling" an option).

Those who elect to buy an option are essentially purchasing the right to either buy (with a call option) or sell (with a put option) the underlying asset at a set price, up to a certain future date. Contrarily, those who write an option are effectively selling this right to conduct the aforementioned trade, but for a premium.

When you enter a trade, you are essentially opening a position (hence the phrases "sell to open" and "buy to open"). If you're buying an option – whether it's a put or a call – you must enter a "buy to open" order. If you're writing an option, you must enter a "sell to open" order.

To exit an order, you must close your options position. If you bought an option, you must use a "sell to close" order, which is akin to owning a stock that you then sell back into the market, in order to close out the position.

Key Takeaways

  • There are two main ways investors can participate in the options market.
    1) They can buy an option.
    2) They can write an option (also known as selling an option).
  • Those who buy an option are essentially purchasing the right to either buy (call option) or sell (put option) the underlying asset at a set price, up to a certain date. On the other hand, those who write an option, are effectively selling this right, for a premium.
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What Do The Phrases “Sell To Open,” “Buy To Close,” “Buy To Open,” And “Sell To Close” Mean?

Still confused? Let's ponder the following scenario: Let's say an investor is interested in purchasing a call option on Citigroup (C) stock, where we assume that the stock is trading for a $1.45 premium and set to expire two-and-a-half months in the future. Let's also assume that the stock's share price is currently trading for $74 and the strike price (the figure at which a derivative contract can be bought or sold) on the call is $78. A trader who wishes to buy the rights to purchase Citi at the future expiration date for $78 may decide to buy this call option. And when he initiates the order through his brokerage account, he'll enter a buy to open order, thereby opening his position on the option. If Citigroup's stock price increases, say to $80.00, before it expires, the trader will exercise his option with a sell to close order. This means that his open option will be closed when he sells the option.

In summary, a person holding a short position (aka, the contract writer) may sell to open (enter a contract) or buy to close (close a position). A person holding a long position (aka, the contract purchaser) can buy to open (enter a position) or sell to close (close a position).