I see these terms often but I am still confused about when to use buy to open versus sell to open.
I’ve traded a bit but just the basics. Now I am looking at options and these terms keep coming up.
Is there an easy way to remember which one to choose? I want to avoid mistakes.
Two basics:
• Buy to open = you’re buying an option, pay premium, can only lose what you paid
• Sell to open = you’re writing an option, get premium upfront, but risk is huge
90% of options expire worthless. Start by buying, not selling.
Use buy to open when you think the price goes up, sell to open if it drops.
Buy to open means you’re purchasing an option and paying the premium, expecting its value to increase. Sell to open means you’re writing the option contract and collecting the premium upfront, but you face more risk if the option gets exercised. With buy to open, your risk is limited to the premium paid, but the potential profits can be significant. It’s advisable for beginners to start with buy to open until you fully understand the mechanics of options trading.
Lost $800 my second month trading Tesla calls because I confused these two.
Buy to open means you pay upfront, hoping it goes up. Worst case? You lose what you paid.
Sell to open means you get paid upfront, but you’re on the hook if things go south. It is way riskier.
Stick to buying until you know what you’re doing.
Think of buy to open like buying a lottery ticket - you pay upfront hoping it’ll be worth more later.
Sell to open is like selling insurance. You get paid right away, but you’re on the hook if things go south.
Most people start with buy to open because your max loss is obvious from the start.