Buy to Open vs Buy to Close
Buy to open versus buy to close in options trading are very different processes that many stock traders don’t understand.
A buy to open order in options trading is when a call or put contract is bought and entered as a long position. The term comes mostly from the fact that when the option seller is a market maker that has to write a new contract they are opening the new long position in the option market. This occurs when there is no matching option selling on the exchange to match up with the buyers order. Regardless the option buyer is opening the long position in their own account. Buy to open is when an option trader enters a long option position.
A buy to close order in options trading is when a short call or put option contract is bought back to cover a position. The term comes from the fact that when an option trader that is short a contract buys back the position from a market maker on the options exchange that was long then the contract is closed. An option contract is removed from open interest and closed when an option trader buys back their option from one of the original writers that opened it. While highly options can trade on the exchange less liquid ones are opened and closed directly with the market makers. Regardless, the option trader is buying to close the short option position in their own account.
Buy to open is when an option trader goes long an option versus buy to close being when a short option position is bought back to cover and close the position in an account.
Mfolozi at the English-language Wikipedia, CC BY-SA 3.0 <http://creativecommons.org/licenses/by-sa/3.0/>, via Wikimedia Commons
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