The four ways you can transact an option are:
- Buy to open (enter)
- Sell to close (exit)
- Sell to open (enter)
- Buy to close (exit)
When placing an order in the market, you will indicate if you are buying or selling the option contract.
The concepts of Buying to Open and Selling to Close are commonly understood. If you don’t own something, you can buy it. If you own something, you can sell it to dispose of the position.
One thing that many traders struggle at first to understand is that they can also Sell an option even if they don’t own the option. This is called Selling Short or Writing.
Buying to close means you are reversing your short position. This is also called “covering” the short position. When you buy the same option you sold short, you are removing your obligation. This is also called “going flat”.
You do not have to indicate to the market if you are opening or closing a position. Your broker may identify this in your ticket for convenience. Having this identifier allows you to verify if you are flattening or adding to a position.