Buy To Open (BTO)

: Summary


Buy To Open (BTO) - Introduction


No other publicly traded financial instruments in the world has more types of trading orders than options. The variety of trading orders that options trading has is one of the first things that astonished options trading beginners and also one of the first mistakes options traders make.

Indeed, using the wrong orders would no doubt result in unnecessary losses and frustration, which makes understanding how they work extremely important. There are four main trading orders that options traders use and they are; Buy To Open, Sell To Close, Buy To Close and Sell To Open.

This tutorial will explain in detail what "Buy To Open" is.




When To Use Buy To Open?


Buy To Open (BTO) is the most basic trading order all options trading beginners must know. Buy To Open is to be used when buying options, no matter call or put options. Yes, you Buy To Open call options and Buy To Open put options as well. A lot of beginners misunderstand buying put options as "shorting the stock" and uses the Sell To Open order instead. That is wrong. To be more technical, Buy To Open is used to establish a long position.

The picture below explains the orders matching in options trading. As you can see, position established using the Buy To Open (BTO) orders are used to be closed with Sell To Close.

options trading orders matching




OppiE's Note Remember, always use the Buy To Close order when closing your naked put or call write position




What Does Buy to Open Mean?


Buy To Open (BTO) means "Opening a position by Buying". This is exactly the same thing as buying stocks. Opening a position is to start a trading position on a particular options contract. There are two main ways to open an options position; Going Long and going short. Buy To Open is opening a position by going long on a particular options contract.
When you Buy To Open an options contract, you are actually buying the options contracts from a market maker and then keeping those options contracts in your account. This allows you to benefit from the ownership of those options contracts including exercising the options if you want to. To get an immediately fill, you should use the Buy To Open order at the option's ASK price.



Buy To Open Call Options


You Would Buy To Open call options when speculating an UPWARDS move in the underlying stock through buying its call options alone. In fact, this is the exact order you will use when executing a Long Call options strategy. Buy To Open call options allows you to own those call options and benefit from its appreciation when the underlying stock goes up and also allows you to exercise the option to buy the underlying stock at the strike price anytime you want to before the call options expire.

Buy To Open Example :
John wants to buy the Jan40Call on the QQQQ to speculate that the QQQQ will go up. He will Buy To Open (BTO) the Jan40Calls.


In order to take profit or stop loss on this position, you would use a Sell To Close order.



Buy To Open Put Options


You would Buy To Open put options when speculating a DOWNWARDS move in the underlying stock through buying its put options alone. This is the order you will use when executing a Long Put options strategy. Buy To Open put options allows you to own those put options and benefit from its appreciation when the underlying stock goes DOWN and also allows you to exercise the option to sell the underlying stock at the strike price anytime you want to before the put options expire.

Buy To Open Example :
John wants to buy the Jan40Put on the QQQQ to speculate that the QQQQ will go down. He will Buy To Open (BTO) the Jan40Puts.


In order to take profit or stop loss on this position, you would use a Sell To Close order.



Buy To Open Questions



:: Must I always buy call options at the ask price, and sell them at the bid?



Buy To Open Videos




Buy To Open AAPL Call Options



Recommended!Execute Buy To Open Orders With Best Options Broker, OptionsXpress!

Javascript Tree Menu

Please LIKE Us

:


Follow Our Updates:

Keep in touch with our updates through RSS...NOW! Follow Optiontradingpedia.com on Twitter