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Options Order Terminology

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Order Types (Buy, Sell, Open, Close):

When placing an options order, there are four types of option order that can be placed: Buy to Open, Sell to Open, Buy to Close, and Sell to Close. If a Buy to Open order is placed, then you are long that contract (call or put), which does not mean the same as being long an asset. Being long a contract simply means that you purchased the contract (i.e., you can be long both puts and calls). If a Sell to Open order is placed, then you are short that contract (i.e., you have simply sold an option, which can be either a put or a call). Buy to Close and Sell to Close orders, on the other hand, are simply orders that close out an existing option position. If you “Bought to Open” then you need to “Sell to Close,” but if you “Sold to Open” then you need to “Buy to Close.”

Definitions:

Buy to Open- An option order that establishes a new position that is long a particular contract.

Sell to Open- An option order that establishes a new position that is short a particular contract.

Buy to Close- An option order that closes out a previous position that was short a particular contract.

Sell to Close- An option order that closes out a previous position that was long a particular contract.


Prices (Bid, Ask, Limit, Market):

When placing an options order, you are allowed to specify various pricing criteria that specify how much you are willing to pay (or receive) for an options contract.  Placing a Limit Order allows you to specify the maximum price that you are willing to pay (or receive) for a contract when you are buying (or selling) that contract. Placing a Market Order, on the other hand, specifies that you are willing to accept the market price, at the time the order is filled (not when the order was placed). The price that someone is willing to pay for a contract is called the Bid (when buying) and the price that someone is willing to accept for a contract is called the Ask (when selling). Lastly, the midpoint between the bid and ask is called the Bid-Ask Midpoint and the length between the bid and ask is called the Bid-Ask Spread.

Trader Tip:

When buying an option contract you will buy at the ask but when you are selling an option contract you will sell at the bid.

Definitions:

Bid - The price that a buyer is willing to pay for a given option contract.

Ask - The price that a seller is willing to accept for a given option contract.

Bid-Ask Midpoint - The price that is exactly in-between the best bid and best ask.

Bid-Ask Spread - The difference between the best bid and the best ask, currently in the market.

Market Order - An order that is to be executed as quickly as possible at the prevailing market price.

Limit Order - An order that guarantees that the price received is equal to (or better than) the price specified, but there is no guarantee that the order is executed.

Contract Terminology

Contract Specifications (Expiration, Exercise, Strike, Underlying, American, European):

An option is a contract that grants the owner of the option the right, but not the obligation, to purchase or sell an underlying asset at a pre-specified price, on or before a pre-specified date. The pre-specified price is called the Strike price (it is also known as the exercise price) and the pre-specified date is called the Expiration date (which is when you are able to Exercise your right to purchase or sell the Underlying asset that is specified in the contract). American options allow you to exercise the option on or before the expiration date. European options, on the other hand, only allow you to exercise the option on the expiration date.

Definitions:

Expiration - The day that the option contract expires.
Exercise - Invoking the rights associated with the option contract.
Strike - The price at which the contract can be exercised.
Underlying - The asset on which the option contract is based.

American - A type of option contract that gives the option holder the right to exercise the option on or before a specified date (this is not an indication of where the contract is traded).

European - A type of option contract that only allows for the option to be exercised on the expiration date (this is also not an indication of where the contract is traded).

Contract Types (Call, Put):

An option contract gives the option holder (i.e. the side of the contract that is long the contract) the right, but not the obligation, to buy or sell a pre-specified asset to the option writer (i.e. the side of the contract that is short the contract). An option contract that gives the holder the right to buy the underlying asset, at a predetermined price, is called a Call option, whereas an option contract that gives the holder the right to sell the underlying asset, at a predetermined price, is called a Put option.

Definitions:

Call Option - A contract that gives the buyer the right, but not the obligation, to purchase an asset at a predetermined price on or before the contract expiration date.

Put Option - A contract that gives the buyer the right, but not the obligation, to sell an asset at a predetermined price on or before the contract expiration date.