Buy to Open

"Buy to open" is one of two ways to open an option position (the other being "sell to open").

Buy to open is essentially the opening of a long position, whether call or put, and a long position, as we've discussed elsewhere is any option (call or put) that you've purchased.

This is a pretty straightforward concept - please see the examples that follow.

Buy to Open Examples

Here are three quick examples:

• Long Call - If I believe a stock will make a big move higher in the near term, and I've decided to purchase a long call in order to capitalize on that move, I initiate my position by buying to open the long call with a set expiration date and at a set strike price.

  That position will remain open until one of three things happens: it expires worthless, I exercise it and take possession of 100 shares by purchasing those shares at the strike price, or I close the open position by selling the call back (called sell to close).

• Long Put - Conversely, if I believe a stock will make a big move lower in the near term, I can purchase a long put and potentially make some big gains if I'm right. As with the above example, even though I'm hoping for the stock to move lower rather than higher, I would still buy to open (this time a put) to initiate the position.

  Again, the position remains open until one of three things happens: it expires worthless, I exercise the put (but only if I owned the underlying shares and purchased the put as a way to hedge my position - this is called a protective put), or I close the position (as above) by selling the put back (sell to close).

• Bull Call Spread - a bull call spread is a simple debit spread where you seek to gain from moves higher in the underlying share price but with less risk than simply purchasing a long call. It consists of buying a call option (a long position) at one strike price and selling a second call (a short position) at a higher price.

  Also, in a bull call spread, both calls (the long one and the short one) are set up for the same expiration month.

  To set up the bull call spread, we wouldn't buy to open the whole spread, but just the long portion of it (the second, short call position is initiated by a sell to open trade). And the most likely outcome of this spread is that at some point in the future we would simply close the trade by selling to close the long call and buying to close the short option.

  Of course, with an options-friendly broker, you would most likely enter the spread as a single trade. But it's important to understand the individual components of that trade, as detailed above.