Opening Purchase

Opening purchase is a term related to derivatives. It refers to a transaction where a buyer’s purpose is to increase a long position or create a long position in a given options cycle. When an opening transaction takes place, an open position exists. An opening transaction is a transaction that begins either a long position or a short position in an options contract.

Highlights

• An opening transaction is a trade that starts a long or short position.
• Buying or holding a call/put option is called a long position, while selling or writing a call/put option is called a short position.
• An options contract enables a potential transaction between 2 parties, which involves an asset at a pre-determined price and date.
• Options trading allows trading of instruments that permits an individual to trade certain security on a specified date and at a specified price.

Frequently Asked Questions-

What is an opening transaction?

The term is associated with options. It is the primary transaction that takes place on the day for a certain security. It is a transaction that begins with a long or a short position in an options contract.

If a put option is written by an investor and then exercised by him afterwards, the original writing of the contract is called the opening transaction. The first trade of an investor in a sequence of a minimum two linked trades is hence, the opening transaction.

Where can an investor invest through an opening transaction?

An investor can invest in a security traded on an exchange via an opening transaction for its income potential or capital appreciation. A security’s growth or value characteristics can signal if that security has some long-term potential.

Short-term investors generally look to invest in a more defined time frame as they look to close the position quickly to gain from favourable short-term volatility.

However, an opening transaction that makes an investor go into a derivative contract has a moderately more significant meaning for thought than the same for a public traded security. An investor has restricted time to create profit from the investment when an investor enters a derivative position. This needs them to, all the more intently, monitor the situation all through life.

What is an options contract?

An options contract is an agreement between 2 parties that gives the holders the right to trade a particular asset by a certain date at an agreed-upon price.

Call and put are two types of options contracts. While the call option allows the holder to buy a security/share, but not with compulsion, at a specified price in a specified time period. The put option allows the option holder with the right to sell an underlying security at a specific strike price within the expiration date.

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Call options and put options can be the American options or European options. The underlying asset can be bought any time up to the expiration date with American option, European option permits to buy the concerned asset on the date of expiration.

What is a closing purchase transaction?

A closing purchase transaction refers to a transaction in which the buyer intends to reduce or wipe out a short position in a stock or a given options series. It is a situation when a trader that has an open position through writing an option, for which they have got a net credit and are looking to close that position.

What is a long or short position in options?

The value of a derivative depends on 1 or more underlying assets and is a contract between 2 parties.

The long position implies that the investor has bought and is the owner of those shares of stock. A short position means that the investors owe the stock to another individual but do not own them yet.

For example, if an investor owns 50 shares of an Apple stock, he is said to long 50 shares as he has paid fully to own these shares. An investor who has sold 50 shares of Apple without owning them yet is said to short 50 shares as he owes 50 shares and is yet to buy the shares in the market to deliver.

What are the ways to trade in options market?

There are 4 basic ways in which trading in option can be done. These are buying a call option, selling a call option, buying a put option and selling a put option.

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Trading in options is making a gamble in the way in which a particular asset price will go. An investor/trader possesses the right to exercise a particular option at any point until the expiration date. Hence, options are deemed to be less risky as their price is obtained from the value of assets like securities, the market etc.

What are the pros and cons of options trading?

Options are considered to be resilient to changes in market prices and provide flexibility as well as liquidity. They can be used to create downside risk protection and a diversify portfolio. They can help in increasing income on present and future investments.  They can also provide good contracts on a range of equities.

Options come with huge leveraging power and returns on options trading can be much greater than buying shares in cash. Further, there are many approaches available for trading in options.

There are certain risks linked to options trading. These risks are related to volatility and market uncertainty as predicting stock price movements becomes a difficult task. If a prediction turns out to be incorrect, it can lead to big losses. Moreover, options trading is more expensive compared to stock trading as most full-service brokers charge higher fees for trading in the same.