Buy To Open Orders
The number of different options orders used in options trading is often bewildering to beginners, as there are so many of them. Before you can get started with options trading you really need to make sure that you understand at least the main types of options orders, although you don’t necessarily need to know about each and every type of order. Placing the wrong order can prove to be expensive as it will likely lead to losses, so it is definitely sensible to learn about options orders and what they are all used for.
There are four main types of options orders, and the buy to open order is the most commonly used. It is one of two orders that can be used to purchase options contracts, the other one being buy to close order. Like the sell to open order, it is an order used to open a new position as opposed to exiting an existing position. It is very similar to buying stocks or other financial instruments, as it means you will actually own the options contract. Once you own an options contract you can sell it if you want to, or you can choose to exercise your option.
Using Buy To Open Orders
You would use a buy to open order to purchase an options contract for one of two reasons; if you felt that the options contract was likely to increase in value over time allowing you to sell it for a profit or if you wanted the right to exercise the relevant option.
If you bought options contracts using a buy to open order and they did indeed increase in value, then you would need to place a sell to close order to sell those options contracts; thus closing your position and realizing any profit you had made. Options traders do typically make their money through buying and selling options contract for a profit rather than exercising the relevant options, but it does depend on what options trading strategies are being used.
A buy to open order can be used to buy any of the various types of options contracts that exist. They are most commonly used to purchase either call options or put options, which are the two main types of options. A call option is a contract that gives the holder the right to buy the underlying security while a put option gives the holder the right to sell the underlying security. The buy to open order can therefore be used to buy options contracts whether you are anticipating the underlying security to go up in value or down in value.
Beginner options traders often assume that as the buy to open options order is used to take a long position, it can only be used to speculate on an upwards movement in the price of any underlying security. However, this is not true. The buy to open order is used to take a long position on the options contract being bought; this isn't necessarily the underlying security of the options contract.
Going long on the options contract means that you are expecting the value of the options contract to go up. The value of those options will change based on price fluctuations in the relevant underlying security, but how the options price changes depends on whether they are call options or put options.
For example, if you have placed a buy to open order on call options contracts then you have bought the option to buy the underlying security at a fixed price (known as the strike price). If the underlying security goes up in value then the price of the call options contract will also go up. However, if you have placed a buy to open order on put options, then you have bought the option to sell the underlying security at a certain strike price. This means the value of the options contract goes up when the price of the underlying security goes down.
As you can see, buy to open orders are flexible, as they allow you to speculate on the value of the underlying security of options contracts going up or down by buying either call options or put options. This of course is very different to buying stock itself (or other financial instruments such as bonds or commodities) where if you physically own an asset you need it to go up in value to make any money. If you wanted to speculate on such assets going down in value you would have to short sell them, which is a bit more complex than simply buying an asset.
How to Place Buy To Open Orders
Members of the public cannot just go out and buy options contracts on the exchanges; they require the services of a stock broker. Most stock brokers will enable you to buy and sell options contracts so you can place a buy to open order with any of those that do. The easiest way to make a buy to open order is to use an online options broker, as all you have to do is log into your account and place your orders accordingly. This is usually a very simple process with most online stock brokers.