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Options Transactions

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Trading options is the same as trading regular stock. There are only two types of transactions, and in each one, traders can either buy or sell. For simplicity, the examples below reflect buying and selling options before the expiration date without exercising and assigning.


Opening Transactions

This type of transaction occurs when an option trader enters the market. The trader can either Buy-to-Open or Sell-to-Open.


Buy-to-Open (Buying a Call Option: Going Long)

When traders think the market price of an underlying asset will rise, they can buy a call option to enter the market. This strategy is known as "going long," where traders expect to sell the option for more in the future before it expires.


Buy 100 call options on Oct.1 at $5 each = $500

Sell 100 call options on Oct.15 at $10 = $1000

Total profit ($500=$1000-$500)


Sell-to-Open (Selling a Call Option: Short Selling )

Traders can also sell (write) a call option when think the market price of an underlying asset will rise. This involves selling options and collecting a premium for taking the risk. The asset involved is either owned (covered put) or not (naked put). Selling-to-Open is known as "going short."


Sell 100 options valued at $5 each

Option expires

Total profit ($500)


Closing Transactions

These transactions occur when traders exit the market. The two types are Buy-to-Close and Sell-to-Close.


Buy-to-Close (Buying a sold Call Option: Covering/Exiting short)

Option traders who exit short sales need to buy back the options they sold when entering the market to cover their short positions. Hopefully, the trader buys back at a price close to what they paid.


Sell-to-Close (Selling an Owned Call Option: Exiting Long)

On the flip-side, traders exiting long positions will need to sell their call options to close. In this case, a trader will want to sell at a higher price than the option's purchase price.


NEXT: [thread=11551]Types of Orders[/thread]

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