Buy to Open vs. Buy to Close: Explained  

The phrase “buy to open” means that a trader is buying—opening up—a put or call option.  

The phrase “buy to close” means that a trader is selling—closing out—either a put or call option. 

In other words: 

Buying to open means that you want to create (open) a new option: You will pay a premium price now to secure your position and have an opportunity to do something later (before the contract’s expiration date) 

Buying to close means trading your portion of an already existing option: You were previously paid to create that option, but now you are paying someone else to take your place until the contract expires. 

Explained: Sell to Open vs. Sell to Close

The expression “sell to open” describes the act of a trader (the original option buyer) selling a put or call option.

The term “sell to close” describes a trader who sells a call or put option to finish a contract (the original option buyer).

ILLUSTRATION OF BUYING AND SELLING OPEN AND CLOSE POSITION

The following are some potential outcomes and the actions you might take:

Buy to open: Create (open) an option contract by purchasing ten shares of Tesla at the current price with the strike price set at $1,000 to obtain the right to sell them at $1,000 per share, even if the actual price does not reach that level, at any time before or on March 31, 2022.

Sell to open: You can sell your ten stocks to someone else at that time for $1,000, but you’ll still be in the game if the share price of Tesla’s stocks rises to $1,500 in, say, six months. In this scenario, you are hoping that the cost would significantly decrease before the contract’s expiration date, allowing you to exercise your option still to buy them out from the broker at a lower cost. You would be forced to purchase the stocks at a higher price even if they didn’t drop.

Buy to close: If the price is still above $1,000 in March 2022, you can repurchase the remaining 10 shares at the current price to stop the contract and release yourself from your obligation. Doing this eliminates the possibility that the price will rise even further in the future.

Sell to close: You would still be entitled to sell the shares at the price of $1,000 to end the contract and earn a profit if the share price remained below $1,000 on March 31, 2022.

FINAL INSIGHT

It’s crucial to fully comprehend everything before you begin investing, regardless of whether you are new to the “buy to open vs. purchase to close” debate or already have a basic understanding of it.

To put it another way, when you buy to open, you anticipate price increases in the future. Selling to close is the action’s conclusion. Conversely, when you sell to open, you would be acting on the assumption that the price will fall, and you would then buy to close.