What Is an Opening Transaction?
An opening transaction, a term typically associated with derivative products, refers to the initial buying or selling that establishes, or opens, a new position. One can buy to open to establish a long position or sell to open a short position. Once an opening transaction has occurred, there thus exists an open position.
- An opening transaction is one that initiates a new position, either long or short, usually in the context of the derivatives markets.
- An opening transaction can also refer to the first trade for a specific security on a given trading day that establishes the opening price.
- Opening transactions are eventually matched by closing transactions that take off, or close, the open position.
Understanding Opening Transactions
Simply put, an opening transaction is the act of initiating a new trade. It can involve taking a new position in a specified security or the entrance into a variety of different derivative contract positions that remain open for a specified time frame. The term is commonly associated with options trading. Options strategies, such as writing an option short or buying an option long, would be examples of an opening transaction.
An opening transaction is the initial step when placing a trade and it involves the purchase of an asset or financial instrument. It generally—but not always—involves a closing transaction at a later point in time, which may be on the same day for an intra-day trade, or days, weeks, or months later for a longer-term investment. An opening transaction can have different considerations for different types of investments, and these considerations will be significantly different for publicly traded securities versus derivatives.
Less commonly, an opening transaction can also refer to the first trade for a specific security on a given trading day. Specifically, this refers to that security's traded price, which is of importance to investors as it gives them a means of comparison to the closing price of the previous trading day.
Publicly Traded Securities
Investors may choose to invest in a publicly traded security through an opening transaction with various motivations. Generally, investors will buy a security for its capital appreciation or income potential. Investors may see long-term potential in a security due to its growth or value characteristics over time. These motivations can be driven by a security's revenue estimates, earnings potential, or fundamental ratios.
Investors and, more specifically, day traders or technical analysts may choose to enter a security position through an opening transaction for its short-term gains. Short-term investors will typically enter an investment with a more defined time frame, seeking to close the position relatively quickly to take advantage of favorable short-term volatility. In this scenario, an investor may open and close a transaction within a matter of hours, days or weeks.
An opening transaction that enters an investor into a derivative contract has a relatively more important meaning for consideration than an opening transaction for a publicly traded security. When an investor enters a derivative position, they have a specified amount of time for which to generate profit from the investment. This requires them to, more closely, monitor the position throughout its life.
In an American option contract, after an opening transaction, an investor has the right to exercise that contract at any time up until the expiration. After expiration, the contract is considered closed. With a European option, the option holder can exercise the option only on the expiration date. For both American and European options, the investor can also trade their option in the market to close out the position.
In a futures contract, an investor buys the derivative for execution on a specified date. They can always sell the contract on the open market up until the expiration. If they hold the contract until the expiration, then they are obligated to meet the demands of the contract, which might include delivery.