Buy-to-open (BTO) orders open a new position and require paying a debit. Sell-to-open (STO) orders open a new position and receive credit. The premium paid or collected is applicable to single and multi-leg strategies.
Opening orders are very important when trading options. In this video I'll quickly cover Buy to Open (BTO) vs Sell to Open (STO). Buy to open orders are new trades that you enter after paying a debit for some strategy or spread. Sell to open orders are new trades that you enter by receiving a credit or premium from selling some strategy or spread.
In this quick video tutorial, I want to go over the difference between buying to open and selling to open. This is something that a lot of people who get into options trading from stock trading have trouble with.
They think when you simply open a new position in options trading, you’re always buying an underlying option or a strategy and that’s just not the case.
You can actually sell an option to open and, you can actually do this with a stock as well, but with options trading, you can sell an option or sell a strategy and take in a credit instead of giving out a debit or paying money to enter that position. I want to go over these two differences with you guys really quickly on this video.
Alright, here we go. Buy to open: This is when an option buyer wants to enter a long position on an option. For example: If you want to buy a call option, you would enter a buy to open transaction.
This is usually what most people who are getting started in options trading do. They buy a lot of options and that’s very simple because they understand it coming from stock trading. But here’s where it gets a little bit different.
Selling to open: On the other hand, sell to open is when an option seller who wants to enter a short position in an option and receiving a credit. In this example, you are willing to write call options, you would earn premiums and you would use sell to open as your opening transaction.
You take in money, you’re selling options and then to later on complete the cycle, you would have to buy those options back or let them expire worthless and that’s how you would round out that whole transaction cycle from beginning to end.
Hopefully, you guys enjoy watching this video. Thanks so much. If you liked it, please share this video right below here on any of your favorite social networks. And happy trading!
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