What Is an Opening Transaction?
An opening transaction is the first buy or sell that creates a new position in derivatives, especially options, such as “buy to open” (start a long position) or “sell to open” (start a short position). The position stays open until a closing transaction, like “sell to close” a long or “buy to close” a short.
Key Takeaways
- An opening transaction initiates a new position in the derivatives market.
- It can involve buying to open a long position or selling to open a short position.
- Opening transactions often have a closing counterpart to complete the trade cycle.
- In options trading, open interest indicates the number of positions currently held.
- Opening transactions can also refer to the first trade setting the day’s opening price for a security.
Unpacking the Mechanics of Opening Transactions
Simply put, an opening transaction is the act of initiating a new trade. It can involve taking a new position in a specified security or the entrance into a variety of different derivative contract positions that remain open for a specified time frame. The term is commonly associated with options trading. Options strategies, such as writing an option short or buying an option long, would be examples of an opening transaction.
An opening transaction is the initial step when placing a trade and it involves the purchase of an asset or financial instrument. It generally—but not always—involves a closing transaction at a later point in time, which may be on the same day for an intra-day trade, or days, weeks, or months later for a longer-term investment. An opening transaction can have different considerations for different types of investments, and these considerations will be significantly different for publicly traded securities versus derivatives.
Less commonly, an opening transaction can also refer to the first trade for a specific security on a given trading day. Specifically, this refers to that security’s traded price, which is of importance to investors as it gives them a means of comparison to the closing price of the previous trading day.
Tip
An options contract’s open interest shows how many positions currently exist in it.
Investing in Publicly Traded Securities
Investors may choose to invest in a publicly traded security through an opening transaction with various motivations. Generally, investors will buy a security for its capital appreciation or income potential. Investors may see long-term potential in a security due to its growth or value characteristics over time. These motivations can be driven by a security’s revenue estimates, earnings potential, or fundamental ratios.
Investors and, more specifically, day traders or technical analysts may choose to enter a security position through an opening transaction for its short-term gains. Short-term investors will typically enter an investment with a more defined time frame, seeking to close the position relatively quickly to take advantage of favorable short-term volatility. In this scenario, an investor may open and close a transaction within a matter of hours, days or weeks.
Delving into Derivative Positions
An opening transaction that enters an investor into a derivative contract has a relatively more important meaning for consideration than an opening transaction for a publicly traded security. When an investor enters a derivative position, they have a specified amount of time for which to generate profit from the investment. This requires them to, more closely, monitor the position throughout its life.
In an American option contract, after an opening transaction, an investor has the right to exercise that contract at any time up until the expiration. After expiration, the contract is considered closed. With a European option, the option holder can exercise the option only on the expiration date. For both American and European options, the investor can also trade their option in the market to close out the position.
In a futures contract, an investor buys the derivative for execution on a specified date. They can always sell the contract on the open market up until the expiration. If they hold the contract until the expiration, then they are obligated to meet the demands of the contract, which might include delivery.
The Bottom Line
An opening transaction starts a new long or short derivatives position and is usually paired later with a closing transaction to exit. Unlike many stock trades that might be held for long-term growth or short-term gains, derivatives positions have time limits and require ongoing monitoring until they’re closed or expire.