Jun 13, 2005

In the course of trying to figure out this futures game, I’m posting a little guideline to buying or selling Options.

When buying or selling options you have four choices stated below:

Buy to Open
Buy Calls to Open is the right to purchase a fixed number of shares, at a fixed price, before a specified date in the future from the seller (writer) of the option.
You would choose this option if you are looking to purchase an option. For instance, you think MSFT (currently trading at 25) will go to 30, so you go and buy the MSFT option using this buy to open option and hope to hit 30. In this case, you would “buy to open” a “call” and the price you would pay would be the “ask”.

Buy Puts to Open is the right to sell a fixed number of shares, at a fixed price, before a specified date in the future to the seller (writer) of the option.
You would also choose this option if you are looking to sell an option tha tyou think will go down. For instance, you think MSFT (currently trading at 25) will go to 20. So, you go and buy the MSFT option using this buy to open option and hope to hit 20. In this case, you would “buy to open” a “put” and the price you would pay would be the “ask”.

Sell to Open

Sell Calls to Open create an option position whereby the seller (writer) would receive premium income from the buyer in exchange for the obligation to sell/deliver a fixed number of shares, at a fixed price, for a specified amount of time to the buyer. You can only sell calls as an opening contract if the stock is long/purchased in the account before the sell.
You would also choose this option if you are looking to sell an option that you think will go down or stay the same. For instance, you currently own MSFT and it is currently trading at 25. You don’t think it will get to 30. So, you write an option and recieve a premium. Then, you hope it doesn’t get to that price. So, you go and write the MSFT option using this sell to open option and hope it stays the same or drops. In this case, you would “sellto open” a “call” and the price you would be asking for the “ask” price.

Sell to Open Puts create an option position whereby the seller (writer) would receive premium income from the buyer in exchange for the obligation to buy/receive a fixed number of shares, at a fixed price, for specified amount of time to the buyer.
You would also choose this option if you are looking to get a premium by promising a stock owner that you will buy shares at a specific price. For instance, you get paid a premium of $50, but the owner of the stock says, if the stock drops to 20, you have to pay me 25. Then, you hope it doesn’t get at or below 20. In this case, you would “sellto open” a “put” and the price you would be asking for the “bid” price.

Buy to Close
Buy a Call to Close will close out, terminate or offset the initial open contracts to the extent of the number of contracts closed out.
Note: Scottrade does not allow buying puts to close, because we do not allow selling puts as an opening transaction.

Sell to Close
Sell a Call to Close will close out, terminate or offset the initial open contracts to the extent of the number of contracts closed out.