Options enable traders to express tailored market opinions with distinct potential outcomes. With this flexibility comes slightly more complex profit and loss scenarios on a portfolio than with buying or selling stock. In this article, we will break down how to place an options order and explore the four basic options transactions, so you know what happens to your portfolio when you execute an options trade.

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An Options Order

Before we discuss transaction types, we need to understand the components of an options order. The options order contains all the relevant information needed to purchase or sell an options contract. Here is an example order:

What does all this mean? Let’s break each piece down.

· Side: This is where you input your choice to either buy or sell the options contract.

· Quantity: The number of contracts you want to buy or sell. Remember, one stock options contract controls 100 shares of the underlying. In this example, we are selling index options, which do not control shares, but rather settle to cash at expiration. (It is always important to read the product specifications to understand the multiplier on the contract.)

· Underlying: The asset that the contract gives you exposure to and the right or obligation to buy or sell.

· Expiration Date: This is the date that the contract is valid until. After expiration, the contract and the associated rights/obligations cease to exist. Different options have different expirations – weekly, monthly, or even yearly.

· Strike: This is the predetermined price at which the owner of the contract can buy or sell the underlying.

· Type: This indicates what type of options contract you want to trade – call or put.

· Price: This is the price that you want to pay or receive for the contract(s).

· Order Type: As with stock trading, an order type indicates how you’d like to trade the options contract. Here are three common order types.

1. A market orderbuys/sells options at the prevailing market prices until the order is filled.
2. A limit order specifies a certain price at which the order must be filled; there is no guarantee that some/all of the order will trade if the limit is set too high or low.
3. A stop order, a type of market order, is triggered when a stock moves above or below a certain level; often used to insure against larger losses or to lock in profits.

· Order Duration: This specifies how long the trade instructions last. In this example, the DAY order means that the instructions expire at the end of the day, and if the trade isn’t filled, the trade is canceled.

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Options Transaction Types

Opening Transactions

To initiate the options order and engage in the contract, you create an opening transaction. This transaction will be either an opening purchase or opening sale. Opening purchases are trades where you are a net buyer, meaning your order costs you money and debits your account. The cash flows out of your account, and a long position is created in your portfolio. When buying options, this cash outflow (premium paid) is the maximum loss for the position(s).

Opening sales are trades where you are a net seller. The sale generates a net credit or cash inflow to your account, while adding a short position on an underlying security in your portfolio. The credit to your account is the maximum gain when selling options.

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Closing Transactions

There may be situations where you decide you do not want to hold your options positions until expiration and realize the outcome of the trade. For example, let’s say you purchased a call option. Perhaps its value has increased and there are other traders who would be interested in purchasing your call option. Or imagine you sold a call option, and you’d like to avoid assignment risk . In these situations, you may choose to exit or close a position by creating a closing purchase or closing sale. Closing transactions are slightly more complex than opening transactions since they require that you sell what you bought or that you buy what you sold. Let’s look at each type.

A closing sale is a transaction that helps you exit your existing long position(s); it does this by selling the same option(s) that you initially bought. Selling the position that you held in the portfolio generates a net credit to your account and eliminates the long positions’ portfolio risk as well. When you close options positions, gains (or losses) are realized when the transaction settles. Whether or not you profit from the closing sale is dependent on if the net credit created in the sale is greater than the net debit from the initial trade.

Conversely, closing purchases are trades that counteract your existing short positions. In a closing purchase, you buy the same option(s) you initially sold. Buying the new position generates a net debit and eliminates the pre-existing short positions’ risk in your portfolio.

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Rolling Transactions

Let’s imagine you have a position, but the expiration date is near, and you’d like to extend it out. You can “roll” your options position forward, meaning you close your existing position and open a new position on the same underlying with a new expiration date that is further out in time.

You can also choose to change the strike price when rolling your options trades. For example, if you own a call with a strike price of $50 and stock is trading at $53, you may decide to “roll up” and open a new position with a strike of $53 and new expiration date. Alternatively, you can choose a lower strike, and this would be described as a “roll down.”

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Disclaimer: Cboe and Webull are separate and unaffiliated companies. This content is provided by Cboe and does not reflect the official policy or position of Webull. This content is for educational purposes only and is not investment advice or a recommendation or solicitation to buy or sell securities.