If you’re going to invest in stocks or options, you’ll need to open a position. Whether short or long, that position represents your investment’s starting point. As the price of a security moves up and down, your investment will grow or shrink relative to that original position. It all starts with the buy to open. 

Buy to open is the technical term for opening a position. To officially open the position, be it a stock or an option, you need to buy in. This involves an exchange of principal for a stake in the prospect of future profits. 

Here’s everything you need to know about buying to open and the ramifications that come with declaring your position in a stock or option. 

Do you know what buy to open means

Buy to Open Stocks

A buy to open action is the simplest way to engage with securities. When you find a stock you’re long on, the first act of purchasing shares is the buy to open. Any subsequent purchase of that stock is referred to as adding to the position. And, when you want to divest yourself from the stock entirely, you’ll sell to close. 

When an investor seeks to establish a long position in a specific stock, the cost that accompanies the buy to open is simply the cost per share multiplied by the number shares of stock, plus any broker transaction fees. Say, for example, you want to open a position in Abbott Laboratories (NYSE: ABT), which currently trades for $127. If you purchase 100 shares, your buy to open cost would be $12,700.

When you buy to open a stock, you become vested in the performance of that company. The value of your investment will rise and fall as the share price does, until you sell to close your position and realize the gains or losses. 

Buy to Open Options

When it comes to options, the premise is roughly the same; however, there are more options for how a trader can buy to open. For example, you can buy long puts or calls. Buying an options contract signifies a buy to open, even if the contract eventually expires worthless. In this situation, open signals intent. 

The cost of buying to open an option depends on the price of the contract, called the premium. Typically, the longer the contract is open, the lower the premium. This is because time is a risk factor in options trading. Longer contracts cost less but assume more risk, while shorter contracts offer more certainty at a higher price. It’s important to remember that the premium is just the cost of the contract and if the trader chooses to exercise it, they’ll also buy to open the position in the underlying security.  

There are several reasons why a trader might buy an options contract. They might seek to capitalize on the price appreciation of a security without actually owning it. Or, they might use the options contract to offset a riskier position, such as a short. In any case, buying to open gives the contract holder a stake in the future outcome of the underlying security: the right, not the obligation, to purchase shares. 

What is Buy to Close?

Like buying to open involves purchasing a stock or options contract, buying to close also involves a purchase. However, the purchase comes at the end of a transaction: specifically, a short sale. 

In a short sale, a trader borrows shares to sell them at the current market price, hoping to buy them back at a discount in the future. In this situation, the trader buys the shares to ultimately close the transaction and return them to the lender. This also holds true for put options. For instance, a trader might sell at-the-money puts with a multi-month time horizon. If the price of the underlying security rises, the options seller might buy to close and capitalize on profits early.

Open and close actions are fundamentally the same; they just differ when it comes to order of operations. Open comes first; and buy to close comes last. 

What is Sell to Open?

Buy to open intuitively makes sense to most investors. You need to open a position to make an investment, right? This is generally the case; however, there are instances where you can sell to open. Specifically, short selling

If you write and sell a short, you’re effectively opening a position by engaging with someone willing to buy that contract. Moreover, selling to open is a credit action, meaning you collect the premium on the options contract. On the flip side, shorting a stock involves selling borrowed shares to open the position and they’ll close a short position with a buy to close.

While it might seem like an oxymoron to sell to open, it’s a legitimate way to enter a short position.

Explore Your Investment Opportunities 

The only way to capitalize on the many wealth opportunities of the stock market is to get involved. That means you need to buy to open a position in a stock or option that you believe will profit in the future. Whether you’re a straightforward stock investor with a long time horizon or a savvy options trader constantly entering and exiting positions, the first step starts with a buy to open action.