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 "Sell To Open" is.
Sell To Open (STO) is the order that baffles the most
options trading beginners. Sell To Open is to be used when SHORTING options, no matter call or put options. A lot of beginners misunderstand buying put options
as "shorting the stock" and use the Sell To Open order when buying put options instead of the correct
Buy To Open order.
To be more technical, Sell To Open is used to establish
a Short option position.
The picture below explains the orders matching in options trading. As you can see, Sell To Open (STO) orders are to be closed with
Buy To Close.
Remember, always use the Sell To Open order when SHORTING options. In options trading, shorting options is known as "writing" options.
What Does Sell To Open Mean?
Sell To Open (STO) means "Opening a position by Selling". 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. Sell To Open
is opening a position by going short on a particular options contract.
When you Sell To Open (STO) an options contract, you are actually creating those options contracts and selling them to a
market maker. This allows you to play "bookmaker" by taking the other side
of a long option position. To get an immediately fill, you should
use the Sell To Open order at the option's BID price.
Sell To Open Call Options
You Would Sell To Open call options when speculating a DOWNWARDS move in the underlying stock through shorting or writing its
call options alone. By shorting call options, you are selling call options to
market makers who are speculating that the underlying stock will go up. In fact, this is
the exact order you will use when executing a
Naked Call Write options strategy. Sell To Open call options puts you in
the obligation to sell the underlying stock to the holder if the options are exercised. If you do not have the underlying stock in your account,
the broker would automatically buy the underlying stock from the open market, sell those stocks to the holder of the call options and then post
the resultant loss in your account.
Example : John wants to write the Jan40Call on the QQQQ to speculate that the QQQQ will go down. He will Sell To Open (STO) the Jan40Calls.
In order to take profit or stop loss on this position, you would use a
Buy To Close (BTC) order.
Sell To Open Put Options
You would Sell To Open put options when speculating a UPWARDS move in the underlying stock through writing its
put options alone. Selling to Open put options means that you are selling
put options to market makers who are speculating that the underlying stock will go down. This is the
order you will use when executing a
Naked Put Write options strategy. Sell To Open put options puts you in the
obligation to buy the underlying stock from the holder if the options are exercised.
Example : John wants to write the Jan40Put on the QQQQ to speculate that the QQQQ will go up. He will Sell To Open (STO) the Jan40Puts.
In order to take profit or stop loss on this position, you would use a Buy To Close (BTC) order.
Important Disclaimer :
Options involve risk and are not suitable for all investors.
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