- 1 sell to open options
- 1.1 Sell To Open (STO) - Introduction
- 1.1.1 Buying Straddles into Earnings
- 1.1.2 Writing Puts to Purchase Stocks
- 1.1.3 What are Binary Options and How to Trade Them?
- 1.1.4 Investing in Growth Stocks using LEAPSÂ® options
- 1.1.5 Effect of Dividends on Option Pricing
- 1.1.6 Bull Call Spread: An Alternative to the Covered Call
- 1.1.7 Dividend Capture using Covered Calls
- 1.1.8 Leverage using Calls, Not Margin Calls
- 1.1.9 What is the Put Call Ratio and How to Use It
- 1.1.10 Valuing Common Stock using Discounted Cash Flow Analysis
- 1.2 Buying to Open vs. Selling to Open Options
- 1.3 Learn about the two basic types of options trades
- 1.1 Sell To Open (STO) - Introduction
sell to open options
Sell To Open (STO) - Introduction
Sell To Open (STO) is the order that baffles the most options trading beginners. Sell To Open is to be used when SHORTING options, no matter call or put options. A lot of beginners misunderstand buying put options as "shorting the stock" and use the Sell To Open order when buying put options instead of the correct Buy To Open order. To be more technical, Sell To Open is used to establish a Short option position.
Sell To Open (STO) means "Opening a position by Selling". Opening a position is to start a trading position on a particular options contract. There are two main ways to open an options position; Going Long and going short. Sell To Open is opening a position by going short on a particular options contract.
You Would Sell To Open call options when speculating a DOWNWARDS move in the underlying stock through shorting or writing its call options alone. By shorting call options, you are selling call options to market makers who are speculating that the underlying stock will go up. In fact, this is the exact order you will use when executing a Naked Call Write options strategy. Sell To Open call options puts you in the obligation to sell the underlying stock to the holder if the options are exercised. If you do not have the underlying stock in your account, the broker would automatically buy the underlying stock from the open market, sell those stocks to the holder of the call options and then post the resultant loss in your account.
You would Sell To Open put options when speculating a UPWARDS move in the underlying stock through writing its put options alone. Selling to Open put options means that you are selling put options to market makers who are speculating that the underlying stock will go down. This is the order you will use when executing a Naked Put Write options strategy. Sell To Open put options puts you in the obligation to buy the underlying stock from the holder if the options are exercised.
Sell to open is a phrase used by many brokerages to represent the opening of a short position in an option transaction. Sell to open means the option investor is initiating, or opening, an option trade by selling or establishing a short position in an option. This enables the option seller to receive the premium paid by the buyer on the opposite side of the transaction.
Sell to open can be established on a put option or call option or any combination of puts and calls depending on the trade bias, whether it is bullish, bearish or neutral, that the option trader or investor wants to implement. With a sell to open, the investor is writing a call or put in hopes of collecting a premium. The call or put may be covered or naked depending on whether the investor writing the call is currently in possession of the securities in question.
An example of a sell to open transaction is a put option sold or written on a stock, such as one offered through Microsoft. In this case, the put seller may have a neutral to bullish view on Microsoft, and is willing to take the risk of the stock being assigned, or put, if it drops below the strike price in exchange for receiving the premium paid by the option buyer.
As another example, a sell to open transaction can involve a covered call or naked call. In a covered call transaction, the short position in the call is established on a stock held by the investor. It is generally used to generate premium income from a stock or portfolio. A naked call, also referred to as an uncovered call, is riskier than a covered call, as it involves establishing a short call position on a stock not held by the investor. As such, it is similar to an outright short position in the underlying stock, with all the attendant risks involved in short selling.
Unlike stock trading, the contractual nature of options offer four different ways for entering and exiting positions. There is an options seller (writer) and an options buyer (holder). The option seller can enter or exit a transaction, and so can an option buyer.
This is the transaction the options buyer make 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 the transaction the options seller make when he wish to enter a short position on an option. For example, if you are writing call options to earn premiums, you would enter a "sell-to-open" transaction.
This is the transaction the options writer make when he wish to exit a short position on an option. For example, if you wish to buy back the calls you had previously sold, you would enter a "buy-to-close" transaction.
This is the transaction the options holder make to exit a long position on an option. For example, if you want to sell a previously purchased call option, you would enter a "sell-to-close" transaction.
Buying Straddles into Earnings
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]
Writing Puts to Purchase Stocks
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]
What are Binary Options and How to Trade Them?
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]
Investing in Growth Stocks using LEAPSÂ® options
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®. [Read on. ]
Effect of Dividends on Option Pricing
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]
Bull Call Spread: An Alternative to the Covered Call
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]
Dividend Capture using Covered Calls
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]
Leverage using Calls, Not Margin Calls
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]
What is the Put Call Ratio and How to Use It
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks". [Read on. ]
Valuing Common Stock using Discounted Cash Flow Analysis
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]
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If they are the same security, it should not be possible to do (2).
If it is possible, it could be viewed as non-compliant as you would be creating fictitious open interest. The regulators are quite keen to reprimand people who perform activities that could be viewed as 'painting the tape'.
There's a bit of confusion here.
You cannot sell to open an option that you already own. Selling it removes it from your account and that is a sell to close.
You cannot "create fictitious open interest", aka "paint the tape" with open interest. Open interest is the total number of option contracts that are currently open.
In and of itself, writing an option (selling to open) does not increase the open interest.
There are 4 possibilities here;
If there is a BTO and a STO, a new contract is created and open interest increases by one.
If there is a BTO and a STC (or a BTC and a STO), the contract is just changing hands and open interest does not change.
If there is a BTC and a STC, an existing contract disappears and open interest decreases by one.
Buying to Open vs. Selling to Open Options
Learn about the two basic types of options trades
By Nick Atkeson and Andrew Houghton
Beginning options traders are generally familiar with “buying to open” options calls and puts, but might not be so familiar with selling to open options, says option trading information.
When you buy to an option, you pay premium to initiate the trade and obtain the rights of the option. You’re now long either a call or put, and you benefit if the underlying equity moves beyond both your strike price and the options premium you paid. Generally, you’re buying volatility because you believe it’s underpriced.
To close that “buy to open” trade, you eventually “sell to close” the call or put. Buying calls and puts — and subsequently selling them to close out the position — is just like regular stock trading. You can buy a stock to open a position and sell the stock to close the position.
“Selling to open” a call or put is called options writing. When you sell to open, you collect premium because you’re selling the rights of the option to another market participant. You’re now effectively short the call or put. You benefit if the underlying equity doesn’t move beyond your strike price. Generally, you’re selling volatility because you believe it’s overpriced.
To close those “sell to open” positions, you eventually “buy to close” the call or put. Selling to open a put is similar to shorting a stock. To close the short stock position, you’d buy the stock. To close the sold-to-open option position, you’d buy to close. Unlike shorting stock, you don’t borrow puts when you sell to open. You’re simply creating new derivatives on the underlying stock.
Selling to open a call carries theoretically unlimited risk. However, selling a call of a stock you already own is one way to generate extra income into your portfolio. This strategy is known as covered call writing. You collect premium when you sell to open a call, and your risk is mitigated because you already own the stock and will be able to deliver this stock if the call you sold is acted on.
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