I want to share with you today is a few terminologies from a question that we had. It’s all about buying to open, buying to close, selling to open and selling to close. I want you to listen first to the question and that way you get an idea of what it’s all about
Question:
I like to trade options, I need you to interpret something for me real quick. Buy to close MDT which is a Medtronic May 15, 2020, $97.50 call at market average cost: 242 dollars at one on bread contracts. Price per share is 99. Sell to close MDT Medtronic May 15, 2020 95 dollars call. Limit price 4.30 dollar. Contracts price per share: 99 dollars. Could you please help me translates your trance or help me to interpret what that means. Thanks.
So when we look at this really we’re looking at the terminology. I want you to first understand on what’s happening when it comes to the overall concept of buying and selling things. You’re either buying or selling something to open it. You got to open something if the door is closed.
So if you don’t have any shares or positions, you’ve got to open something up. If you do have shares in positions, now you have to close something up right.
In order to complete it, you got to close it. So it’s either opening or closing.
Buy to Open
First thing, buy to open it doesn’t matter which to stock, that means you have zero positions, zero contracts and zero shares.
If I buy to open let’s say five contracts, at 120 strike, 45 days out.
So now once you complete this order, you will be buying to open and you will get five contracts that are at 120 strikes 45 days out.
Buy to Close
Now, what is buy to close?
Well in order for this to work, it’s a whole different game.
Why is that different?
Because in order to close something, you’ve had to have something open. So you might have had three contracts you sold at 140 strike and it was 37 days out.
That means in order for you to close it, you have to buy it back.
How does that work?
Well I need to buy three contracts and I need to do the same thing at 140 strike and 37 days out or the same expiration.
That will get me to zero, which is the goal. Zero is means you’re flat. You don’t own anything, you don’t owe anybody anything. So if you’re buying to close you have to have some kind of position open. Then to close it, you’re buying to close this out.
Sell to Open
Now you can work in reverse. So let’s say we sell to open.
What do you think that means? Sell to open means I’m starting with a zero position. I’m trying to open something that means I would sell first.
Let’s say here, negative seven contracts at the 90 strike and 10 days out. So I’m selling to open, that means I have a negative 7 contracts in my account. I owe somebody something.
What do I need to do? I need to to close this.
That is where I go buy to close.
Sell to Close
How does that work?
Well in order to close something, I would have to bought something first. I would have had to have, let’s say, plus nine contracts at twenty 220 strike at 15 days out.
What does that mean? I need to sell to close.
So I had to have negative nine contracts to close it at the same strike and 15 days out.
How does this work?
I can open up the position. Then the buy to open, I need to sell to close.
That’s how you close that position. In buy to close, well first, you got to sell to open then you buy to close.
Buy to Open to Sell to Close
Sell to Open to Buy to Close
So basically you’re opening up the position with a buy order and then you have to close the position with the sell order. You’re opening the position with a sell order and you’re closing the order with a buy order.
That’s the way that it works.
Do you really need to know these terminologies? Not necessarily. As you take a look at this and we go into our contracts
I’m looking to get into Disney right here.
Let’s say I’m buying four or adding four contracts, that means I’m gonna be opening up four contracts because I don’t have any positions.
It doesn’t say here buy to open or buy to close. That’s usually when you’re doing it on a web browser.
I could sell or buy and it doesn’t say ‘to open’ or ‘to close’ because this platform understands what you’re doing. If I’m doing something more on Netflix here.
I’ve got positions, so how do I close these trades out?
Well in this case, I’m +1. I’ve bought to open. Now -1 would be sell to close.
Another example.
This one I’ve sold to open, how do I close it? I buy to close this one.
This one because I’m +2, I would sell to close. That’s how these kind of a work. Together this kind of creates a weird Iron Condor strategy.
But overall, these were verticals so I’ve done a vertical sold and a vertical to open.
Does it really matter that I’ve called it sell to open? No.
It’s just I’ve sold a vertical just to simplify the lingo.
So anyways that’s really the terminology. Usually those are used in a web-browser.
