Termonology

I want to trade options with my online brokerage; however, the site has some confusing terminology. What do the phrases "sell to open", "buy to close", "buy to open", and "sell to close mean"?

Before trying to understand the different positions one can hold with options, think of the positions one can hold with stocks. With a stock you can either buy it or sell it. You have only two alternatives.

However, because of the nature of options, specifically their contractual basis, they offer four different alternatives for entering and exiting positions. There is an option writer and an option purchaser. The writer can enter or exit a transaction, and so can an option purchaser. Entering an options transaction as a writer is known as opening a short position - or selling to open. Conversely, when a writer closes a short position, he or she is buying to close. The person buying an options contract is said to be opening a long position - or buying to open. Finally, an options purchaser exiting or closing a long position is said to be selling to close.

In summary, a person holding a short position (contract writer) can sell to open (enter a contract) or buy to close (close a position). A person holding a long position (contract purchaser) can buy to open (enter a position) or sell to close (close a position).