Jim Woods

Learning Options Lingo

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Before you can be a player, you've got to know the lingo.

This is true in virtually every walk of life, but it's particularly true when it comes to trading options. With options there are a whole slew of terms to understand. Some of these terms, like puts and calls, are very basic and you should already be familiar with them.

Some terms, however, require a little bit more explanation. When placing an options order, you want to make sure you get the wording correct.

The following "language" will make more sense as you get more familiar with options. Since options are so versatile and since you can be both an option buyer and an option seller, it's important for you to know the following terms:

Basic Options Trading Terms

• Buying to Open -- When you want to buy a call or a put option, you will be "buying calls to open" or "buying puts to open." You are a buyer, and you are "buying to open" a new position.
• Selling to Close -- Let's say you buy a call option for $3. During the next two weeks, it goes up in value to $5, so you decide to sell your call option (this was a "buy to open"). When you want to sell, the terminology is "selling to close." You bought something to start a position; you are selling it to close out that position.
• Selling to Open -- You can open a position by selling an option. Think of it as being the option writer or the side of the contract that's going to take on an obligation. If you are going to write a covered call, for instance, you would already own the stock, but to do your option order, the phrase is "selling calls to open" (followed by whatever the month and strike price might be). To open this position, you are selling and taking in the premium.
• Buying to Close -- When you go to close out your covered call position, you have to close the transaction by buying back what you sold. Hence, a "buy to close" order.