Stock trading terminology can be very confusing, even for experts, especially when terms used for options trading are applied to the share market!
For example, what does BTO mean in stocks? We explain the term in both contexts and how to use the order type in detail below.
What Does BTO Mean in Stocks?
BTO is an abbreviation for buy to open. The term is often used in the context of options trading, but it might also be used for stocks. In the derivatives market, buy to open is an order type used the first time a trader takes a long position on a call or put option for a certain security.
It is important to note that the term only refers to the first transaction.
If the trader increases their holdings later, it won’t be considered a BTO since the position will already be open.
As it is the first transaction, a buy-to-open often indicates certain things to other market participants about an investor’s intentions.
For example, it is often a good indicator that they are taking a bullish position on the underlying stock’s price.
Placing a large BTO order signals that they want to cash in on this.
The best part about options trading is that these instruments offer very low risk for the trader.
If their bet goes right, they might make a lot of money.
However, when it doesn’t, the option will simply expire out of money. The only loss would have been the price paid for the options.
Note that creating a buy-to-open order does not always have to indicate bullishness on the trader’s part.
It could be a spreading or hedging strategy to offset a different holding previously set up.
The order size is usually a good indicator of which of these two scenarios is correct.
Large orders usually indicate the first possibility, whereas smaller ones suggest the second case.
BTOs may not always be available for traders.
In some situations, the options exchange might decide that only closing orders are allowed for specific underlying assets.
This usually happens when the security is about to get delisted or trading is about to halt.
BTO in Stocks
Even when applied to stocks, buy to open essentially means the same thing.
It is an order to establish a new position by buying shares in a firm.
Whenever the shares are sold off, the final order to do this will be a sell-to-close (STC) one.
Again, it will only be called this if all remaining shares are being disposed of.
Selling a partial position means not closing the holding, and such orders will not be termed STCs.
What Does BTC Mean?
BTC stands for buy to close. It is a type of order used to create a long position on a call or put option to square off an existing short.
This order type stands in contrast with buy-to-open orders, where a completely new holding is getting created.
In this case, on the other hand, the buy order is meant to close out an older holding.
Option sellers usually create a BTC order since they have the original short position on the instrument.
On the other hand, buyers create buy-to-open ones, which they later close out with STCs (which we discussed earlier).
BTC in Stocks
The term buy to close is also used in the stock market. It refers to the practice of “short selling.”
This involves borrowing shares from a broker to sell them in the market.
Such a position must eventually be closed out by buying back the securities (hopefully at a lower price than the trader sold).
When the final order to close out a short-sell position is placed, it will be a buy-to-close order.
What Does STO Mean?
Sell to open (STO) is an order type that helps a trader create a new short position in either put or call options on an underlying security.
When used in the context of stocks, the counterpart term is simply to sell short (abbreviated as SSHORT).
Like buy to open, sell to open also establishes a new position.
As with BTOs, it could be a marker for the trader’s belief that the underlying security is moving in a certain way, or it might just be a hedging strategy.
What does STC Mean?
Sell-to-close is the exact opposite of a buy-to-open order.
As the name suggests, it involves closing off a position by selling all holdings in a certain option or stock.
In fact, a buy-to-open order will eventually have to be closed with a sell-to-close one unless the trader requests for the option to be exercised.
How Do Buy to Open Orders Work?
Unlike stocks, the terminology for creating an options position is not as simple as buying or selling.
Instead, traders need to specify either of the four order types we mentioned above – buy to open, sell to open, buy to close, or sell to close.
The buy-to-open order type often tells about the trader’s belief that an underlying asset will increase.
For example, let’s say an investor is convinced that there will be a strong positive price movement in a certain security.
They can create a buy-to-open order for a sizable amount with a call option on the share.
When the price increases, the call option will become in the money, and investors can then book their profits.
On the other hand, BTOs could also indicate a hedging strategy.
Let’s say that instead of buying a call option on the above stock, the investor buys the stock directly.
They might create a buy-to-open for an out-of-the-money put option to hedge the investment.
Its strike price could be slightly below the current market price.
This way, if the security starts to fall, they will still profit when the put option becomes in the money.
In either case, it is always possible to increase the holdings later.
But only the first order, which establishes the initial position, will be called buy to open.
After that, it will simply be called going long or short.
Example
Let’s plug in some numbers in the example we shared earlier.
Let’s say that an investor believes that XYZ stock is headed from a current price of $60 to an $80 level.
They can try to profit from it by creating a buy-to-open order for a call option with a strike price of $70.
If the underlying stock moves up, the option will soon be in the money, and the trader can book profits by creating a sell-to-close order.
Now instead, consider the second case where they bought the stock directly.
To safeguard their position from losses, the investor might consider creating a buy-to-open order with a put option position having a strike price of $55.
This option would become in the money as soon as the share price falls below $55.
Therefore even though their stock holding might be red, the put option will still give them a profit, making it a successful hedge.
They can close the holding in the shares later on when the price moves back up.
BTO vs BTC
Buy-to-open orders are usually created by options traders.
It lets them initiate a holding position in an option from which they expect to profit.
Over time, the option’s value will diminish (as long as the underlying asset remains at the same price).
This is because the option’s time value diminishes as it goes nearer to its exercise date.
Option sellers, on the other hand, already have a short position. To trade an option, they had to have placed a sell-to-open order.
Hence, time value moves favorably for them.
They have a lesser incentive to close their position before the expiry.
Still, there might be certain scenarios where sellers may want to get rid of their (shorted) holdings.
For example, consider the case where the underlying stock in a call option was rising significantly.
Let’s assume that, by all indicators, nothing stops the share from moving even higher as time goes on.
In such a situation, it would be prudent for the option seller to exit with a buy-to-close order as early as possible.
This might limit the potential loss that seems to be coming up.
On the other hand, if the security was falling significantly, the seller might be motivated to book profits early by creating a buy-to-close order.
BTO vs BTC in Stocks
The terms buy to open and buy to close might also be used in the case of stocks sometimes.
In share trading, buy to open is the first order for creating a holding in a certain firm’s securities.
On the other hand, a buy-to-close is the same as buying a stock to close out a short-sell position.
In this case, a buy-to-close is the last part of the transaction that balances the portfolio.
Is Buying BTO Worth it?
Yes, taking a buy-to-open order is worth it. A BTO is the first step to creating a holding in a certain option.
Therefore, for traders who want to deal in these derivatives, there is no going around them.
Buy-to-open orders can be used for creating a position or hedging an existing one in a different instrument for the same underlying asset.
Therefore, they are also quite versatile.
Final Thoughts
When used in the context of options, a buy-to-open order is the first order placed to create a holding in a certain call or put.
If applied to stocks, it means almost the same thing – buying a new share.
BTOs can be used both to create a new position or to hedge an existing risk.
To understand buy-to-open orders, it is also important to understand the other associated order types: sell to close, sell to open, and buy to close.
While sell to close (STC) is the exact opposite of a buy to open (BTO), the other two order types have different meanings.
Buy-to-close orders help traders close out their short-sell positions in stocks.
When used in the context of options, they are usually employed by option sellers to close their position early.
Sell to open is the polar opposite of a buy to close.
Traders should understand how to use each of these four order types to execute their strategies.
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