What Does Buy To Open Vs Buy To Close Mean?
by Ankita Tripathy Investing 05 December 2022
What is the meaning and difference between buy to open vs buy to close? If this is something that you are searching for, you have reached the right place.
There are several terms that traders use for online trading. There are terms like buy to open, sell to open, buy to close, and sell to close. Not all of these are known to us. However, if you are someone who is taking an interest in the stock market, you will get to see these words more than often.
Keep reading this article till the end to learn more about the same…
But First, Learn About Terms!
Before coming to the main part of the article and telling you about what is buy to open vs buy to close, there is something that you need to know. And it is about the meaning of certain terms that are associated with buy to open and buy to close.
Here are the terms that you need to know the meaning of:
1. Options
Options, in the world of trading, denote the contract between the buyers and the sellers. It gives the traders a right to buy or sell the shares in the market at a fixed price within a given and fixed time.
In order to make transactions in the market, traders are allowed to trade options. This means that people in the world of trading can trade these contracts. They can create a brand new contract or option, as well as trade their existing contracts and positions.
Now there are two types of options— call and put. Let us take a look at them…
2. Call
A call option is when the contract gives the owners a right to buy a specific security or an underlying asset (it can be a commodity, a bond, or a stock) at a specific price. It should be kept in mind that this is a right but not an obligation.
3. Put
A put option is when the contract gives the owner the right to sell a specific security or an underlying security and its fixed amount at a specific price. Similar to the call option, this is just a right and not an obligation.
Buy To Open Vs Buy To Close: Meaning And Examples!
Now that you know what are the important terms related to trading, let us get straight to the point and tell you what is buy to open vs buy to close.
Buy To Open: What Is It?
If there is a term that brokerages use in order to represent an establishment of a new call or put in the trading stock, it is the phrase buy to open.
Buy to open is a kind of order type that is used to denote the fact that the trader is opening (buying) either of the two options, a put option or a call option. The term means that you are ready to create or open a new option or contract.
Example Of Buy To Open
If you want to understand how the buy to open works, I have a great example for you.
If a trader analyzes the market and concludes that the price of a given stock will rise and become from $60 to $80 in a span of one year, then the trader will probably decide to buy to open a call for the stock.
Read More: 5 Most Effective Value Investing Techniques in Stock Market
Buy To Close: What Is It?
Buy to close is a term that is used by the option traders when they want to exit an already existing options trade when a trader chooses a buy to close or end a contract.
The buy to close is a kind of order type that is used to denote the fact that the trader is closing (selling) with of the two options, a put option or a call option. The term or phrase means that you are trading the portion of the option that already existed.
Example Of Buy To Close
In case you want to know how the buy to close works, you should check out this example.
If a trader analyzes the market and realizes that the price of the security or commodity will drop from $60 to $30 in a span of a year, then the trader can decide to buy to close a put for the stock.
Frequently Asked Questions (FAQs):
As you have almost reached the end of the article, here are some of the questions that you might want to take a look at. These are frequently asked by the readers or users who search for the meaning of buy to open vs buy to close. So take a look at them to know more.
Ans: Buy to open is the term that is used in order to purchase a stock or security when the price of the security is going to gain value. On the other hand, the sell to open is the opposite. It is when the trader waits for the asset to lose all its value in order to collect money in the market.
Ans: The term or phrase sell to close is used when the trader uses a sale in order to close an existing option or position.
Ans: If you are thinking about the best time to buy to close, I have got you covered. The best time to buy to close is when you (the trader) want to exit an already existing option.
Wrapping It Up!
There are many terms that traders use in their day-to-day business. Two of these are ‘buy to open’ and ‘buy to close.’ Traders use the term buy to open when they are ready to create a new contract. On the other hand, you can use the term buy to close when you want to exit an already existing contract or option.
In case you want to know the meaning of buy to open vs buy to close, I hope that this blog is really helpful to you. If there are any other queries, leave them in the comment box below.
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