Just when you thought winter would never come, here I am to offer a little helpful review for all the options traders out there. Like with any business or specific job, a variety of terminology and even slang is used to describe various actions or activities. Options trading is no different and if anything, options terminology can be even more confusing than traditional stock trading.
The hard work for traders is typically the quest to find high probability risk versus reward setups. Once they are found, options traders have an arsenal of trading strategies for a large variety of trade setups. Just as important is the type of order used to enter the trade.
Sometimes newbie option traders stare at an order screen and are tripped up by options order terminology. Traders have many choices regarding order types. Even basic, unassuming choices can be daunting. “Do I want to sell to open or sell to close?” While this seems somewhat basic, new traders struggle with options order terminology routinely.
An order to buy to open means that executing a trade will result in a new, not previously held long position. An order to sell to open indicates that a trader has created, or opened, a new short position.
An order to sell to close can be entered if the trader already has a long position and is hoping to eliminate the position—which could be done for either a loss or a gain. When a trader buys an options contract(s) to close the trader eliminates an existing short position by “buying it in” for either a loss or a gain.
Options terminology can be further complicated when it comes to more advanced order criteria: stop vs. stop limit vs. trailing stop, fill or kill vs. immediate or cancel, contingencies vs. triggers, even whether to use a market or a limit.
With all these choices, options traders still must get the position structure correct, too. Writing or buying various options spreads such as butterflies or condors requires multiple orders, which are different based on the chosen construction. An order entry error or a misunderstanding of an options order setup could lead to a mistake resulting in unnecessary losses.
You can contact Dan at www.markettakers.com.