What Is Open Rotation?

Open rotation is the system that is used to open trading on an options market. This process usually takes place for the first time each morning during a regular trading day. The open rotation system may also be used again if, at some point, trading is halted in the middle of the day.

The term open rotation may also refer to a type of market order. In this case, it refers to an order to either buy or sell an options security that is to remain active throughout a regular trading day's opening trading rotation. Open rotation orders that are not filled during the initial rotation automatically expire.

Key Takeaways

  • Open rotation is the system that is used to open trading on an options market.
  • This process usually takes place for the first time each morning during a regular trading day, but it may also be used again if, at some point, trading is halted in the middle of the day.
  • The length of time it takes to complete the full open rotation for an entire options series depends on the trading volume for both the underlying stock and the options.

Understanding Open Rotation

Open rotation is similar to an at-the-opening order in the stock market (but open rotation occurs in the options market). Unlike stocks, options must wait to begin trading until an opening price for the underlying security has been determined.

This is conducted through a process that first accepts orders and quotes for the series of call options that expire the soonest and have the lowest strike price. This rotation continues through all the near-term series of call options. Then, the rotation moves onto the calls that expire further out.

Once all of the calls are open, the process continues with the put options, starting with the puts with the highest strike price and the nearest expiration date. The rotation system then moves on to puts with lower strike prices. Eventually, it moves on to options with longer-dated expirations. This rotation system continues until all option series underlying a particular stock are trading on the exchange.

The length of time it takes to complete the full open rotation for an entire options series depends on the trading volume for both the underlying stock and the options. The process tends to move quicker for stocks with more liquidity. These stocks also tend to have options with relatively more trading volume; this further speeds the open rotation process.

Special Considerations

An open rotation order does not necessarily mean the order must be executed at the opening bell. A rotation may also sometimes come into play during fast market conditions if markets are not operating in an orderly fashion. If a stock is halted, all options trading on that particular stock is also stopped (until the stock reopens again). At this point, the rotation process is started again.

It can also apply to trades that are executed when the market opens back up after closing for various reasons, including technical issues that require the reopening of trading midday. For example, floor officials on the Chicago Board Options Exchange can stop trading for up to two business days if the underlying stock has a delayed opening, or if other unusual circumstances exist.

Once trading resumes, open rotation comes back into play. Further, the exchange may suspend the use of stop and limit orders during unusual market conditions to help restore the market’s integrity. Again, open rotation is used when the market restarts.