4 Ways to Trade Options

There are many different types of complex options strategies, but at the end of the day there are only 4 ways to transact an option

4 Ways to Trade Options

There are FOUR ways in which you can transact an options contract:

Buy a call option
Sell a call option
Buy a put option
Sell a put option

Let's say you're bullish company ABC. You can buy a call option.
When you decide to close the position you would then sell the call option.
Now let's say you're bearish company XYZ. You can buy a put option.
When you decide to close the position would then sell the put option.

Once you've gotten a grasp on the 4 basic ways in which you can transact an options contract it's time to start educating ourselves on the ways the options are being transacted.


Let's simplify the 4 ways (buy a call, sell a call, buy a put, sell a put) into simply:

Buying a contract
Selling a contract

Within buying there is:
Buying to open (BTO)
Buying to close (BTC)

Within selling there is:
Selling to open (STO)
Selling to close (STC)

The phrases "To open" and "to close" give added meaning and provide additional context to the trade. Every option transacted will either be transacted 'to open' or 'to close'.

A "buy to open" refers to a trader buying for themselves a new position (whether it be a call or a put). When the trader is ready to sell (or close) their position they would be "selling to close".

A "sell to open" would refer to a trader opening a new position, but being on the short side. Selling (or writing) a covered call/cash secured put would be an example of a 'sell to open transaction.' In order to close a position that was 'sold to open', you would "buy to close".


Why does this matter?

Understanding these concepts is crucial for any trader interested in analyzing flow, and especially for those attempting to follow 'unusual options flow'.

What makes distinguishing between 'opening' and 'closing' trades difficult is the fact that they are not expressly labeled as such.

- Consider that a transaction in which a trader has bought (to close) $1,000,000 in (covered) calls will look very similar to a trader who is buying (to open) $1,000,000 in calls, but the sentiment is wildly different between the two traders.

Look for a future blog post where we'll go over some examples of clear and unclear analysis of 'opening' and 'closing' flow trades.