The flag on an options order stating whether it opens a new position or closes an existing one; it drives open interest and margin.
Every options order carries buy-to-open, buy-to-close, sell-to-open or sell-to-close. This is not cosmetic. Opening trades add to open-interest and to margin; closing trades reduce both.
A wrong flag can leave you with two offsetting positions instead of none, doubling commissions and buying-power-reduction while carrying identical risk. On a broker that does not auto-correct, it can also turn a covered position into an accidental naked-call.
Example: you are long one XYZ $55 call and enter sell-to-open by mistake instead of sell-to-close. You now hold a long call and a short call — still a spread, but with margin charged on the short leg and two positions to unwind rather than zero.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
Educational only, not advice. Spotted an error? Post in Site Feedback.