Buy to open — short explainer
Definition
– “Buy to open” is the instruction you give your broker when you are initiating (opening) a new long position in an options contract — buying call or put options to establish exposure. It signals you are creating a position, not closing one.
Why this matters
– It tells market participants and the clearinghouse that you are initiating a new long option position.
– It limits your downside to the premium paid (for a long option) while providing leveraged upside if the underlying moves in your favor.
– The same words are used differently in other contexts: for options there are four order intents to choose from — buy to open, buy to close, sell to open, sell to close — and for stocks the first buy that creates a holding is effectively an opening buy.
Key terms (short definitions)
– Buy to open: purchase of an option to start a new long option position.
– Buy to close: buy used to terminate (close) a previously sold short option position.
– Sell to open: sell of an option to initiate a new short option position (creates an obligation).
– Sell to close: sell used to close an existing long option position.
– Time decay (theta): the tendency of an option’s value to decline as expiration approaches, all else equal.
– Buy-to-cover / buy to close (for stocks): buying shares to close out a short-sale position.
Checklist — before placing a buy-to-open order
1. Confirm options trading approval level with your broker.
2. Choose the underlying, expiration date, and strike price that match your view and horizon.
3. Check the option’s premium, implied volatility, and Greeks (especially theta).
4. Decide order type (limit vs market), size (number of contracts; 1 contract = 100 shares), and routing preferences.
5. Verify you have sufficient buying power or margin for the trade and potential assignment obligations if selling elsewhere in the same strategy.
6. Review fees, commissions, and assignment/exercise rules for the exchange and broker.
7. Place the order with the intent “buy to open” (not just “buy”) so the broker and clearing system record the order correctly.
8. Monitor position and have an exit plan: target, stop, or time-based exit.
How to place a buy-to-open order — step-by-step (generic)
1. Log into brokerage options trading interface.
2. Select the option contract (ticker, strike, expiration).
3. Choose action = Buy and intent = Buy to Open.
4. Enter quantity (contracts) and price (limit or market).
5. Review margin/buying power impact and agreement confirmations.
6. Submit order and confirm execution receipt.
7. Track position; to exit later, choose “sell to close” (if you hold the long option) or exercise if appropriate.
Important practical notes
– A buy-to-open order can fail to execute if the exchange restricts opening trades (e.g., when a series is being closed or the underlying is halted or being delisted).
– Large buy-to-open activity can signal market expectations, but context matters — spread trades and hedges often require both opening and offsetting legs.
– Option buyers face an explicit disadvantage from time decay; sellers benefit from theta but carry obligation and potentially unlimited risk.
– If you sold an option (sell to open) and later want to exit, you will use buy to close.
Worked numeric example — buying a call to open a position
Scenario:
– Underlying stock XYZ currently trades at $40.
– You expect the price will rise over the next year.
– You buy to open one call option contract with strike $50 and 12 months to expiration. Premium (price) = $2.00 per share.
Calculations:
– One option contract = 100 shares, so cost = 2.00 × 100 = $200 (this is your maximum loss if the option expires worthless).
– Break-even at expiration = strike + premium = $50 + $2 = $52.
– If XYZ finishes at $60 at expiration, the option’s intrinsic value = $60 − $50 = $10 → value = $10 × 100 = $1,000.
– Profit = option value − premium paid = $1,000 − $200 = $800.
– Return on the option = $800 / $200 = 400% (note: option returns are leveraged; return on the underlying stock would differ).
Short-cover (buy-to-close) worked example (stock short)
– You short 100 shares of ABC at $50 → you receive $5,000 proceeds.
– Later you buy to close 100 shares at $55 → you pay $5,500.
– Loss = $5,500 − $5,000 = $500 (ignoring commissions/interest).
When to use buy to open vs buy to close
– Use buy
to open when you want to initiate (open) a long options position — for example, buying a call because you expect the underlying to rise — and use buy-to-close when you need to end (close) an existing short position you previously opened by selling (sell-to-open). In short: buy-to-open opens a long contract; buy-to-close eliminates a short contract.
Practical checklist: placing buy-to-open vs buy-to-close orders
– Confirm your intent: opening (you will own the option) vs closing (you are eliminating a short sale you already wrote).
– Verify position status on your brokerage ticket (net quantity, long vs short flags). Don’t rely on memory.
– Choose order type: market (fills immediately at best price) or limit (fill only at your price). For thinly traded strikes, prefer limit orders.
– Specify duration: Day vs Good-Til-Canceled (GTC) per your strategy.
– For multi-leg strategies, use a single multi-leg ticket to avoid leg risk; an individual leg ticket can leave you exposed.
– Check margin and account permissions (options trading level) before sending the order.
– Confirm execution details and the broker’s execution code (BTO, BTC, etc.) on the trade confirmation.
Worked numeric examples (options)
1) Buy-to-open (long call)
– You buy 1 XYZ June 50 call, premium = $2.00 → cost = $2.00 × 100 = $200.
– If at expiration XYZ = $60, intrinsic value = $10 → option value = $1,000; profit = $1,000 − $200 = $800; ROI = $800 / $200 = 400%.
– If XYZ expires ≤ $50, option worthless → loss = $200 (max loss).
2) Buy-to-close (closing a short call)
– Earlier you sold-to-open 1 XYZ June 50 call for $2.00 → you received $200.
– Later you buy-to-close that same contract at $1.50 → cost = $1.50 × 100 = $150.
– Net profit = $200 − $150 = $50 (ignores commissions/fees).
Worked numeric example (short stock cover)
– You short 100 shares ABC at $50 → proceed = $5,000.
– To close, you buy 100 shares at $55 → cost = $5,500.
– Loss = $5,500 − $5,000 = $500 (ignores borrowing fees, dividends, commissions).
Common pitfalls and how to avoid them
– Mis-specifying open vs close: Confirm the broker’s order ticket shows BTO (buy-to-open) or BTC (buy-to-close) and that your resulting position matches intent.
– Leg risk in spreads: If you open or close legs separately, one leg may fill and the other may not. Use multi-leg tickets whenever possible.
– Early assignment: If you sold (sell-to-open) an American-style option, you can be assigned any time before expiration. Maintain margin or hedge accordingly.
– Thin markets and gapping: Illiquid strikes can have wide bid-ask spreads; limit orders help control execution price.
– Automatic assignment and exercise: Know your broker’s policy on automatic exercise (often done for in-the-money options at expiration by default).
– Tax treatment: Options and short sales have tax consequences (short-term capital gains, wash sales, etc.); consult a tax advisor for your situation.
Order types and execution notes
– Market orders: faster but may fill at a worse price, especially in low-liquidity strikes.
– Limit orders: control price, useful for option spreads or large orders.
– GTC vs Day: GTC can persist and unexpectedly fill; cancel if you no longer want the order.
– Routed order codes: BTO = buy-to-open, BTC = buy-to-close, STO = sell-to-open, STC = sell-to-close. Some brokers auto-determine, others require explicit selection.
Margin and account requirements
– Buying options (buy-to-open) typically requires only the premium (cash) if done in a cash account.
– Selling options (sell-to-open) often requires margin and approval for specific option levels because of potential assignment risk.
– Closing a short option (buy-to-close) removes the obligation and can free margin.
When to prefer buy-to-close vs allowing expiration
– Buy-to-close when you want to lock in profit or limit loss before expiration or to avoid assignment risk.
– Letting an out-of-the-money option expire may be fine if premium is negligible; monitor for commissions that might make small closeouts uneconomical.
– If you sold an in-the-money option near expiration and want to avoid assignment (especially if you don’t hold the underlying), buy-to-close is the safer path.
Recordkeeping and confirmation
– Keep trade confirmations and note whether the trade was BTO/BTC. This simplifies P&L tracking and tax reporting.
– Reconcile your broker’s end-of-day position report to ensure your intent (open vs closed) was executed.
Assumptions and limits of these examples
– Examples ignore commissions, fees, and borrowing costs.
– Option pricing can include time value, implied volatility, and interest/dividend effects; intrinsic-value calculations assume expiration and ignore time premium.
– Early exercise is possible for American options; results at expiration may differ if assignment occurs earlier.
Further reading (selected official sources)
– Options Clearing Corporation (OCC) — “About Options” https://www.theocc.com
– Chicago Board Options Exchange (CBOE) — Options education and order types https://www.cboe.com/education
– U.S. Securities and Exchange
Commission (SEC) — Options / investor guidance https://www.investor.gov/introduction-investing/investing-basics/investment-products/options
– Internal Revenue Service (IRS) — Publication 550, Investment Income and Expenses (covers tax treatment of options) https://www.irs.gov/publications/p550
Practical “Buy to Open” checklist (step‑by‑step)
1. Confirm trade intent
– Decide you are opening a new long option position (buy to open, BTO), not closing one (buy to close, BTC).
2. Verify contract specs
– Ticker/symbol, expiration date, strike price, call vs put, contract size (standard = 100 shares).
3. Choose order details
– Order type: use a limit order to control execution price; avoid market orders in illiquid strikes.
– Quantity: number of contracts × 100 shares per contract.
– Time-in-force: day order or GTC (good‑til‑canceled) as your strategy requires.
4. Check cost and buying power
– Premium = quoted price × 100 × number of contracts.
– Add estimated commissions and fees.
– Ensure you have sufficient cash or margin buying power to cover the outlay.
5. Review risk profile
– Max loss = total premium paid (plus fees) for a long option.
– No margin calls for a long option position itself, but account margin requirements may be affected for other positions.
6. Enter the order and confirm
– Mark the order as Buy to Open on the ticket if your platform requires it.
– After execution, reconcile the trade confirmation with your intent and update your position log.
7. Recordkeeping
– Save confirmations, note BTO/BTC, entry price, commissions, and any subsequent adjustments (rolls, assignments, exercises).
Worked numeric examples (clear, simple)
Example A — Buying to open a call
– Trade: Buy to open 2 contracts of XYZ Jul 50 call at $1.20 per share.
– Cost calculation: 2 contracts × 100 shares/contract × $1.20 = $240 premium.
– Commissions/fees: assume $6 flat → total cost = $246.
– Breakeven at expiration (ignoring time value left): strike + premium = $50 + $1.20 = $51.20 per share.
– Risk: max loss = $246 (if option expires worthless). Upside is theoretically unlimited (less premium).
Example B — Buying to open a put
– Trade: Buy to open 1 contract of ABC Sep 30 put at $2.50 per share.
– Cost: 1 × 100 × $2.50 = $250 premium; assume $1 fee → total $251.
– Breakeven at expiration: strike − premium = $30 − $2.50 = $27.50 per share.
– Risk: max loss = $251. Profit increases as the underlying falls below $27.50 at expiration.
Key risks and operational notes
– Time decay (theta): long options lose
…extrinsic value as expiration approaches. Theta (θ) measures this time decay: a negative theta means the option loses value each day all else equal. Time decay accelerates in the final weeks before expiration and is larger for at‑the‑money options than for deep in‑ or out‑of‑the‑money options.
Other key risks and operational points
– Volatility (vega): Vega measures sensitivity to changes in implied volatility (IV). Higher IV raises option premiums; falling IV reduces them. For example, if an option’s vega = 0.10, a 1 percentage‑point rise in IV increases the option price by $0.10 per share (=$10 per contract). Volatility moves can meaningfully change an option’s value even if the underlying’s price is unchanged.
– Liquidity and bid–ask spreads: Many options, especially far‑dated or low‑volume strikes, have wide bid–ask spreads. A market order can fill at an unfavorable price; using limit orders helps control execution price. Check average daily volume and open interest before trading.
– Early exercise and exercise consequences: Some U.S. options are American‑style and can be exercised before expiration. Buyers can exercise, but early exercise of calls is rarely optimal unless capturing a dividend or avoiding margin costs. If you exercise a call you bought, you must have or be willing to fund the cash to purchase 100 shares per contract; if you exercise a put, you must be willing to deliver (short) or settle the shares per your broker’s rules.
– Assignment risk: Assignment (being required to fulfill the obligation of a short option position) applies to sellers, not buyers. However, buyers should understand assignment dynamics because exercising can trigger assignment on other positions in a multi‑leg strategy.
– Capital and margin: Buying (going long) options typically requires only the premium plus commissions/fees; it does not create a margin obligation the way naked selling does. Verify with your broker for any specific cash or margin holds required on exercise.
How to place a buy‑to‑open order — checklist
1. Confirm the underlying symbol and option chain (expiration date, strike, call/put).
2. Choose the right strike and expiration based on your outlook and risk tolerance.
3. Confirm quantity (1 contract = 100 shares).
4. Calculate total cost = premium × 100 × contracts + fees.
– Example: Buy to open 2 contracts at $1.20 = 2 × 100 × $1.20 = $240 premium; add $1 per contract fee → total $242.
5. Select order type: prefer a limit order to control price; use market orders only if immediacy is more important than price.
6. Set an exit plan: target price and max loss (or a time stop). Decide in advance whether you’ll sell to close or exercise if ITM (in the money) near expiration.
7. Monitor Greeks: delta for directional exposure, theta for time decay, vega for volatility sensitivity.
8. Confirm the order as “Buy to Open” in your ticket (this explicitly opens a long option position).
Worked numeric example — theta and vega impact
– Position: Buy to open 1 contract of XYZ 50 call at $2.50 (cost = $250).
– Greeks (example): delta = 0.40, theta = −0.05, vega = 0.12.
– Daily time decay: theta × 100 = −$0.05 × 100 = −$5/day (all else equal).
– If implied volatility falls 2 percentage points: price change ≈ vega × 2 × 100 = 0.12 × 2 × 100 = −$24 → option price ≈ $2.50 − $0.24 = $2.26 (=$226).
– If underlying rises enough to increase delta to 0.60 and option gains $0.50 intrinsic value, those moves combine with greeks effects; always re‑calculate P&L using updated prices.
Practical tips
– Use limit orders to avoid paying wide spreads.
– Prefer buying options with sufficient open interest and volume.
– Be explicit in your order (Buy to Open) so broker/exchange routing and position records are correct.
– Avoid holding options into expiration unless you have a clear plan for exercise or assignment.
– Keep track of expiration dates; options can expire worthless and result in a total loss of premium.
Quick reference formulas
– Total cost paid = premium × 100 × contracts + fees.
– Breakeven at expiration:
– Call breakeven = strike + premium per share.
– Put breakeven = strike − premium per share.
– Max loss for a long option = total cost paid (premium + fees).
– Delta ≈ change in option price per $1 move in underlying (per share).
– Vega ≈ change in option price per 1 percentage‑point change in IV (per share).
– Theta ≈ change in option price per calendar day (per share).
Resources for
Resources for continued learning and tools
– Real‑time quotes and options chains — Use your broker’s options chain for live quotes and execution. For exchange data and market statistics, see the Chicago Board Options Exchange (CBOE): https://www.cboe.com
– Official rules, exercise and assignment procedures — The Options Clearing Corporation (OCC) explains exercise/assignment mechanics, settlement and margin practices: https://www.theocc.com
– Retail investor education and basics — The U.S. Securities and Exchange Commission (Investor.gov) has clear primers on options, risks and required disclosures: https://www.investor.gov/introduction-investing/investing-basics/derivatives/options
– Practical tutorials and reference articles — Investopedia offers accessible articles and examples on option strategies, Greeks and order types: https://www.investopedia.com/options-basics-tutorial-4583012
– Tax treatment of options — For U.S. federal tax rules that commonly apply to option transactions (reporting, wash sales, capital gains vs. ordinary income), consult IRS Publication 550: https://www.irs.gov/publications/p550
Quick pre‑trade checklist (use before placing a buy‑to‑open order)
1. Confirm liquidity: check bid‑ask spread and open interest for the strike and expiration.
2. Verify premium and total cost (contracts × 100 × premium) and include fees/commissions.
3. Compare implied volatility (IV) vs. historical volatility to judge relative expensiveness.
4. Identify breakeven(s) and maximum loss (premium paid) in your plan.
5. Decide holding plan: sell before expiry, let expire, or exercise (if applicable); note assignment risk.
6. Set risk controls: limit/stop orders, defined max loss, and position size consistent with risk tolerance.
7. Check tax and margin implications for your account type.
Tools and calculators to try
– Options calculators (pricing, Greeks, breakeven) — many brokers provide built‑in calculators; CBOE and OCC provide educational tools and examples.
– IV/Volatility charts — compare current IV to historical percentiles before entering a trade.
– Strategy profit/loss graphers — simulate outcomes across underlying price scenarios and expirations to visualize risk.
Further reading (books and course suggestions)
– “Options, Futures, and Other Derivatives” — John C. Hull (textbook for technical foundations).
– “Options as a Strategic Investment” — Lawrence G. McMillan (practical strategies and trade management).
Check library excerpts or textbook summaries before purchasing.
Educational disclaimer
This information is educational only and not individualized investment advice. It does not recommend buying or selling any security or option. Confirm details with your broker, tax advisor, or legal counsel before trading.