I have been trading for a while but still feel confused by these terms. I understand that buy to open is buying a contract to start a position.
But I get thrown off by sell to open. How can you sell something you do not own yet? I have made mistakes with this before.
I would like to know how others remember the difference between these two.
Selling to open is like creating a contract to lend. Helps clarify it.
Think of sell to open as writing a contract - you’re creating one that someone else buys from you.
Buy to open means you expect the price to go up. Sell to open means you think it’ll stay flat or drop.
Start small with this strategy. It’s the best way to see how each option affects your account.
Last month I mixed these up and lost $200 on a position I thought was bullish but was actually bearish.
Sell to open means you get paid upfront but you’re on the hook for something. Buy to open means you pay for the right to do something.
My rule now: if I’m paying, I’m buying to open.
Selling to open means you’re taking on a commitment for the premium you receive. Your broker expects you to fulfill this if necessary. Buy to open lets you decide when to exercise your rights. Remember this: if you’re collecting a premium, you’re selling to open. If you’re paying a premium, you’re buying to open.
Sell to open creates new contracts. You receive premium upfront but you must fulfill terms if the buyer exercises.