Many investors use their brokerage accounts to buy stocks, bonds, and other investments directly. Investors can also purchase other types of securities in their brokerage, like derivatives such as options. This gives you the right but not the obligation to sell certain securities or futures, which requires that the buyer buy the securities by a certain date. When you open a position in options or futures, you are buying to open. For example, if XYZ is trading at $50 and you think that the shares will gain value, you might decide to submit a buy to open order for calls. You can choose the number of contracts to purchase and the strike price of those contracts. Most options contracts cover 100 shares of the underlying security. If you buy 10 calls, you have the right to sell 1,000 shares at the strike price. You might submit a buy to open order for 10 call options with a strike price of $53. If XYZ rises above $53 before those options expire, you can exercise them to earn a profit.
How Does Buying To Open Work?
Buying to open works by giving you ownership of a derivative. For example, if you submit a buy to open order for put options, you’re buying put options that give you the right to sell shares for a specific price. You’re said to be opening a position because owning those contracts puts you in a position where you can profit from movements in the underlying security. Once you have an open position, you will eventually have to close it. An options position automatically closes once the contract expires. You can also exercise the option to close the position.
Buy To Open vs. Sell To Open
To buy options, investors need money to pay for the options’ premiums. By contrast, selling an option doesn’t require an upfront investment. However, selling a derivative means the investor only collects a premium payment when selling the contract, and they could lose large amounts if the underlying stock moves significantly in the wrong direction.
What It Means for Individual Investors
If you’re an investor who is interested in using derivatives, it’s generally safer to buy derivatives than to sell them. When buying options, your risk is limited so you don’t have to worry about unexpectedly emptying your account by selling an option that generates massive losses. This means most investors who use options should primarily be opening positions using buy to open orders rather than sell to open orders. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
