Loading the player...
A:

The confusing terminology mentioned in the question deals with entering and exiting option orders. In review, there are two main ways in which you can participate in options: You can either buy an option or write an option (also called selling an option). When you buy an option you are purchasing the right to either buy (call option) or sell (put option) the underlying asset at a set price before a set date. If you write an option, you are selling this right 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 are buying an option, either a put or a call, you must enter a "buy to open" order. If you are writing an option, you must enter a "sell to open" order.

Now, to exit an order, you need to close your options position. If you bought an option, you need to use a "sell to close" order, which is essentially like owning a stock where you sell it back into the market to close out the position. If you wrote an option, you will need to use the "buy to close" order. While it may seem odd that you would buy to close a position, by taking a long position in the option, you neutralize the rights you sold when you wrote the option with the rights gained when you buy the new options, which closes your position.

For example, let's look at a call option on Citigroup (C) stock, trading for a $1.45 premium and set to expire two-and-a-half months from now on Jan.19, 2018. Citi's stock price is currently trading for $74 and the strike price on the call is $78. A trader who wants to buy the rights to purchase Citi in two and-a-half months time for $78 may decide to buy this call option. When he makes 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 to, say, $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 (contract writer) can sell to open (enter a contract) or buy to close (close a position). A person holding a long position (contract purchaser) can buy to open (enter a position) or sell to close (close a position).

For more information, check out Options Basics Tutorial and Stock Basics Tutorial.

RELATED FAQS
  1. What does high open interest tell you about an option?

    Learn about the open interest of options contracts and what a high and a low open interest indicate about the liquidity of ... Read Answer >>
  2. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ... Read Answer >>
  3. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
Related Articles
  1. Trading

    Options Trading Volume And Open Interest

    Learn how these two statistics can give you an edge in trading options.
  2. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  3. Trading

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  4. Trading

    The 4 Advantages of Options

    Flexible and cost efficient, options are more popular than ever. Find out why.
  5. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  6. Trading

    How to Sell Put Options to Benefit in Any Market

    As long as the underlying stocks are of companies you are happy to own, put selling can be a lucrative strategy.
  7. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  8. Trading

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  9. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
RELATED TERMS
  1. Sell To Close

    In options trading, an order to sell an option that you own and ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  3. Buy To Open

    A term used by many brokerages to represent the opening of a ...
  4. Back Fee

    A payment made to the writer of a compound option in the case ...
  5. Sell To Open

    A phrase used by many brokerages to represent the opening of ...
  6. Option Premium

    1. The income received by an investor who sells or "writes" an ...
Hot Definitions
  1. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  3. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  4. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  5. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  6. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
Trading Center