Types of Buy and Sell Orders
A comprehensive guide to understanding buy-to-open, sell-to-open, buy-to-close, and sell-to-close instructions for listed option transactions, including key regulatory and practical considerations.
24.4 Types of Buy and Sell Orders
Understanding how to properly enter buy and sell orders is a big deal in options trading. You know that feeling when you’re about to place a trade, and you pause because you can’t remember if it’s “Buy to Open” or “Buy to Close,” right? It might sound like a minor detail, but getting it wrong can definitely cause confusion—or worse, create unintentional positions. In this section, we’ll talk about the four main types of order instructions in listed options: Buy to Open, Sell to Open, Buy to Close, and Sell to Close. We’ll also explore real-world scenarios, potential challenges, tips for using these orders effectively, and connect everything to Canadian regulatory requirements under CIRO (the Canadian Investment Regulatory Organization).
Building on the previous sections in this chapter, we’ll see how these order types fit into the bigger picture of entering listed option orders. Equities also have buy and sell instructions, but options are more specific because an option can be opened or closed from both the long side and the short side. So, let’s get started.
Overview and Motivation
Before diving into the details, let’s do a quick refresher. In a typical equity trade, you usually hear “Buy shares of XYZ” or “Sell shares of XYZ.” But with options, you have the possibility to adopt a long position (holding calls or puts) or a short position (writing calls or puts). Because options can be either long or short, we have distinct instructions to tell your broker or trading platform whether you’re initiating a new position or exiting an existing one. This notation also helps keep track of margin requirements, open interest, and regulatory reporting.
And, if you’re investing or trading in Canada, you’ll often see references to the Bourse de Montréal for listed equity, index, and ETF options. The Bourse enforces certain rules about labeling orders, and these rules align with CIRO membership requirements. Detailed knowledge of these instructions is essential for compliance as well as clarity.
Buy to Open
When you use a Buy to Open order, you’re essentially initiating (or “opening”) a new long position in an option contract. For instance, say you want to buy a call option for the first time on a stock you believe will rise in value. You’d enter a “Buy to Open” order so your broker systems and the exchange get the message: “I’m opening a new long position in this option.”
• Example scenario: Let’s suppose you strongly believe that MapleLeaf Inc. (fictitious ticker: MLI) will see a big price increase in the next three months because they’re launching a new product. You decide to buy 10 call option contracts. Your order ticket would say something like “Buy to Open 10 MLI March 50 Calls at $2.00.”
• Why it matters: The “Buy to Open” instruction notifies everyone that you’re creating a new position, not closing an existing one. This helps keep the ledger accurate—especially important for margin calculation.
In many broker platforms, hitting “Buy to Open” might be as simple as selecting the appropriate dropdown. But you’ve still got to be careful. One moment of inattention, and you might choose “Buy to Close” by mistake, which might not even go through if you don’t already have a short position to offset.
Sell to Open
While “Buy to Open” is used to start a long position, “Sell to Open” is used when you want to write (or short) options, thereby opening a new short position. This includes writing both calls and puts. So if you’re a covered call writer, or if you’re placing a naked put, you’re likely to use “Sell to Open.”
• Example scenario: You own 500 shares of MapleLeaf Inc. but feel the stock might stall or move sideways for a while. You might want to generate some extra income by writing calls against those shares. So you’d instruct your broker: “Sell to Open 5 MLI March 60 Calls at $1.50.” This means you’re creating a new short call position, effectively writing an option contract that someone else can buy.
• Why it matters: The instruction clarifies that it’s a new short position rather than closing out a previously purchased option. Paired with your existing shares, this is the essence of a covered call strategy and can lead to added premium income—assuming the strategy fits your outlook and risk tolerance.
I recall a friend who tried to write a covered call but accidentally selected Sell to Close on the trading platform. The system refused the order because there was no existing long option position to close. It was a minor embarrassment, but it illustrates how even a single drop-down list can create confusion.
Buy to Close
Buy to Close is used when you want to neutralize or cover an existing short option position. If you’ve previously written puts or calls, and now you want out of the trade, you use Buy to Close.
• Example scenario: Imagine you previously wrote 3 short put contracts on MapleLeaf Inc. at a strike price of 45. Let’s say you collected a premium of $2.00 per share. The trade was going in your favor, and the option premium has now dropped to $0.50. You want to lock in your gains, so you place a “Buy to Close 3 MLI March 45 Puts at $0.50.”
• Impact on profit/loss: In that scenario, you gain from the difference between the premium you initially collected ($2.00) and the cost to close it ($0.50). So effectively, you’ve made $1.50 per contract, times 100 shares per contract times 3 contracts = $450 total, minus commissions.
It’s easy to see how reversing “Sell to Open” with a “Buy to Close” makes sense: you open the short position, and you eventually buy it back to close.
Sell to Close
Finally, if you hold a long option position and you want to exit it, you’ll use Sell to Close. This closes out an existing long position, whether it’s a call or a put.
• Example scenario: Suppose you bought 2 MapleLeaf Inc. call option contracts a few weeks ago. The stock’s done well, and each contract’s premium has climbed by 50%. You want to cash out on your profit, so you’ll “Sell to Close 2 MLI March 50 Calls.”
• A cautionary tale: I once overheard a colleague say, “I just sold to open a call option I bought.” Obviously, that’s contradictory—he meant Sell to Close but used the “Sell to Open” terminology. This kind of slip-up can lead to a broker’s compliance team reaching out, or at worst, an unintended double position.
Why These Distinctions Matter
Option instructions are not just about semantics; they have real ramifications:
• Compliance and reporting. Exchanges like the Bourse de Montréal demand accuracy in reporting openings and closings so they can measure open interest and track market activity properly. CIRO membership guidelines also require that brokers maintain correct records to match each client’s positions.
• Regulatory oversight. A mis-labeled order can cause confusion over your margin requirements, particularly if it looks like you have an offsetting position when you don’t. This can lead to potential margin calls or compliance inquiries.
• Risk management. It’s simpler to manage your positions and measure your risk exposure when your account accurately shows opened and closed trades.
Diagram of Order Flows
Below is a simple Mermaid.js flowchart summarizing how a Buy to Open order differs from Buy to Close, Sell to Open, and Sell to Close, along with the direction of position changes in your portfolio.
flowchart LR
A["Trader <br/> Places Option Order"] --> B["Choose Correct <br/> Action"]
B --> C["\"Buy to Open\" <br/> (Initiate Long)"]
B --> D["\"Sell to Open\" <br/> (Initiate Short)"]
B --> E["\"Buy to Close\" <br/> (Cover Short)"]
B --> F["\"Sell to Close\" <br/> (Exit Long)"]
In the chart, the decision point is making sure you choose the right label. If you’re creating or building a new long position, that’s “Buy to Open.” If you’re building a new short position, that’s “Sell to Open.” If you’re unwinding or covering a short, that’s “Buy to Close.” If you’re exiting a long, that’s “Sell to Close.”
Regulatory Context in Canada
Canada’s regulatory environment is shaped by CIRO, which resulted from the amalgamation of the former IIROC and MFDA. CIRO is responsible for overseeing investment dealers, mutual fund dealers, and market integrity in equity and debt marketplaces nationwide. If you’re trading on Bourse de Montréal, your broker must comply with CIRO’s rules, including proper reporting of open/close transactions.
• CIRO membership and transaction reporting. Firms must accurately classify and report when a position is being opened or closed to avoid mismatches in margin or compliance records.
• The Bourse de Montréal’s resources. The Bourse website (https://www.m-x.ca) has educational modules about option order types, explaining the difference between short and long positions.
Common Pitfalls and Tips
It’s easier than you might think to choose the wrong instruction. Maybe you’re in a rush, or you’re frustrated that the market is moving quickly. Regardless, watch for the following pitfalls:
• Confusing “Buy to Open” with “Buy to Close.” If you never had a short position, you can’t “Buy to Close.” If your platform or broker rejects the order, that’s actually a blessing—at least it’s preventing a mismatch.
• Accidentally adding to an existing position. If you wrote 5 calls last week and now intend to exit them, but you choose “Sell to Open” instead, you’d end up with a bigger short position rather than closing it. That can drastically change your risk exposure.
• Overpaying commissions or fees. Continuously opening and closing positions incorrectly might trip multiple sets of transaction fees depending on your broker’s fee structure.
One strategy to minimize confusion is to confirm your existing positions before placing a new order. Most trading platforms have a position tab showing exactly how many contracts you’re short or long. Glancing at that tab can confirm whether you’re indeed opening or closing.
Real-World Example
Let’s say you have a short call option you wrote a month ago on MapleLeaf Inc. at a $55 strike. The option was originally opened at $2.00. Now the premium has grown to $3.00 because the stock price is nearing $55, which is not what you expected. You worry that continued gains might push that premium even higher, so you decide to cut your losses. You go to your broker’s platform, look at your existing short calls, and place a “Buy to Close” order to repurchase them at $3.00.
• The trade will cost $3.00 per contract, meaning you lose $1.00 per share from the initial $2.00 you collected, for a net loss of $100 per contract (since every contract covers 100 shares), plus commissions.
• By carefully indicating “Buy to Close,” you ensure your short call position is removed. If you had chosen “Buy to Open” by accident, you would wind up with both the existing short call and a brand-new long call. That would create a different position known as a spread—hopefully not what you intended.
Implications for Margin and Risk
Your margin requirements hinge on whether you’re opening or closing a short position. Typically, short options require margin coverage because of the theoretical unlimited risk (in the case of short calls, especially if uncovered). By properly labeling your order as a “Buy to Close,” you eliminate that margin requirement once the short is closed.
If you accidentally place a “Buy to Open” order, your margin doesn’t drop. In fact, your short position is still on, and you’re paying for a new long position. This can create confusion and even lead to margin calls if the broker sees you have two offsetting positions but not recognized as a spread.
Cross-Reference with Other Chapters
The concept of “Buy to Open” vs. “Sell to Open,” “Buy to Close” vs. “Sell to Close” might show up in other contexts:
• In Chapter 18 on Bullish Strategies, you’ll notice you might “Buy to Open” a call if you’re bullish. But if you initially sold that call, you’d “Buy to Close” to exit.
• In Chapter 19 on Bearish Strategies, you might “Sell to Open” a call if you believe the price won’t rise above a certain level.
• CIRO guidance on ensuring that these trades are properly labeled is also touched on in Chapter 21, which deals with conduct and practices.
Useful Resources
• CIRO official website: https://www.ciro.ca
• Bourse de Montréal (for educational materials on trading options): https://www.m-x.ca
• “The Option Trader’s Hedge Fund” by Dennis A. Chen and Mark Sebastian. This book is easy to follow and packed with practical insight into buy and sell mechanics, including example strategies that rely on writing options.
It might be helpful to keep a mini-checklist right by your trading screen:
- Confirm your current position (long or short) and the number of contracts.
- Decide if you want to increase or decrease your existing position.
- Verify your “open” or “close” action.
- Double-check the final order entry screen before submission.
It’s honestly pretty simple once you get into a rhythm, but I’ve known plenty of traders—both newbies and experienced folks—who’ve made slip-ups when they were in a hurry or dealing with a fast market. So take your time.
Conclusion
Option trading is packed with nuance, and nowhere is that more evident than in the precise instructions you give your broker. “Buy to Open” or “Buy to Close,” “Sell to Open” or “Sell to Close”: these are the four ways to define whether you are initiating or exiting a position. Getting it right will ensure your account accurately reflects your intended exposures, your broker’s compliance and margin calculations remain correct, and your trading records line up with CIRO and Bourse de Montréal requirements.
When you apply these core instructions properly, you’ll avoid the dreaded “bummer trade” that you did not intend, and you’ll be on your way to building more refined strategies involving options—whether that’s hedging, speculating, or generating extra yield on an existing stock portfolio. Always remember the cardinal rule: confirm your existing positions first, then specify the correct order instruction to match your intended action. It may feel repetitive, but it sure beats explaining to your compliance department why you accidentally ended up with a double short position.
