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#86 - The Difference Between "Buy To Open" & "Sell To Open": Hey everyone. Welcome back to the daily call. My name is Kirk, here again at Option Alpha. On today’s daily call, I want to talk about the difference between buy to open and sell to open for options trading. Now, this one is one that I think a lot...

#86 - The Difference Between "Buy To Open" & "Sell To Open": Hey everyone. Welcome back to the daily call. My name is Kirk, here again at Option Alpha. On today’s daily call, I want to talk about the difference between buy to open and sell to open for options trading. Now, this one is one that I think a lot...

A partire dalThe "Daily Call" From Option Alpha


#86 - The Difference Between "Buy To Open" & "Sell To Open": Hey everyone. Welcome back to the daily call. My name is Kirk, here again at Option Alpha. On today’s daily call, I want to talk about the difference between buy to open and sell to open for options trading. Now, this one is one that I think a lot...

A partire dalThe "Daily Call" From Option Alpha

valutazioni:
Lunghezza:
5 minuti
Pubblicato:
Dec 17, 2017
Formato:
Episodio podcast

Descrizione

Hey everyone. Welcome back to the daily call. My name is Kirk, here again at Option Alpha. On today’s daily call, I want to talk about the difference between buy to open and sell to open for options trading. Now, this one is one that I think a lot of people get slipped up on and it’s just a very subtle difference, but it’s confusing because when you get started in options trading, it’s obviously another dimension if you will. With stock trading, it's very easy to understand. You buy stock and then you sell it hopefully at a higher price. When most people start transitioning, they start realizing that with stock trading, you can actually sell stock at a higher price and buy it back at a lower price and that's called short selling a stock or short trading. The same thing actually happens with option contracts. When you buy to open, you are basically outlaying money, you're buying an option contract to initiate a position or start a position. Now, the catch to that is eventually, you have to sell to close. If you buy to open, the only way that you can get your money back or to complete the trade is to sell back your option contract to close a position and get whatever value is left in it. In this case, if you're buying to open initially, you’re usually doing some sort of a debit trade. It doesn't have to be necessarily a single long contract. You could buy a debit spread where you do a combination, but you’re still outlaying money to initiate the position. Again, the only way that you get money back is you hopefully see that position increase in value, so that you can sell to close. Now, the difference between that and the other example which is sell to open is that in the case of sell to open, you are actually selling a contract or a spread that you have to close, buy back to close later on to complete the transaction. I know it’s a little bit confusing when you get started because how can you sell something you own. Well, you basically… In very simple terms, you have an obligation to buy back that contract. You openly sell that contract to somebody else with the understanding that you will buy that contract back in the future or close the position and complete the trade. When you sell to open in options trading, you're taking in a credit and that credit is usually the most amount of money that you can possibly make on the trade. If we sell to open say a straddle and we take in an $800 credit, we really can't make any more than $800. Our goal at that point is then to buy back that straddle at a future date or when implied volatility drops or when time decay starts working its magic to buy back that straddle and complete the transaction for less than the $800 credit that we took in. This is actually no different than insurance. Insurance is very much the same way. The insurance company sells you insurance, they sell you a policy on a house and they promise… It’s basically an obligation or a promise that if something bad happens to the house, that they will pay, they will outlay the money to repair the house or fix the house or whatever the case is. The same thing happens in options trading. We sell a contract… We’re basically selling an obligation that says that we will buy the stock or complete the transaction in the future. Now, just like an insurance company, if they sell you insurance on your house and nothing bad happens, well, they complete that contract at the end of the year and they resell you insurance again. They sell it to you again the next year and the next year and the next year and the next year, continuing to collect premium until or if nothing ever happens to your house and they collect all this premium. The same thing happens in options trading. We continue to sell premium. If nothing happens during that month and our short strikes don’t ever get hit, we continue to hold that premium and keep it or we buy the contract back later at a lower price and complete the trade. Again, it’s a very subtle difference, but
Pubblicato:
Dec 17, 2017
Formato:
Episodio podcast