A Stock Trader’s Guide to Option Order Types

Jesse Anderson

Published on January 14, 2025

If you trade stocks, you already know the basics of buy and sell orders. But options trading is a bit more nuanced. You can’t just hit “buy” or “sell”—you need to be a little more specific about what you want to do. Using the wrong order type could accidentally double your position when you meant to close it or leave you exposed to big risks.

But don’t worry. While options order types might seem more complicated at first, they follow a logical pattern that becomes second nature once you understand the basics.

In this guide, we’ll break down each type of options order, explain exactly when to use them, and help you avoid common pitfalls that even experienced stock traders sometimes encounter when they start adding options to the mix.

Opening Position Orders

The two most common option order types are “buy to open” and “sell to open.” But unlike buying or selling a stock, you’re not just betting on whether the market will go up or down—you’re specifying the role you want to play in the options contract.

• Buy to Open – Think of “buy to open” as paying for a privilege. Whether you’re buying calls or puts, you’re purchasing the right (but not the obligation) to do something later. As a buyer, your risk is limited to the price you pay for the option, which means you cannot lose more than your initial investment.
• Sell to Open – Now we’re entering more sophisticated territory. When you “sell to open” or “write” an option, you’re playing the role of the option creator. You’re collecting the premium upfront in exchange for taking on an obligation, which means you also have more risk—even unlimited risk if you sell “naked” calls.

The key to successful options trading isn’t just about getting the direction right—it’s about choosing the appropriate order type for your strategy and risk tolerance. “Buy to open” trades can be an excellent way to protect your portfolio (e.g., by buying protective puts) while “sell to open” trades can help you generate income (e.g., with covered calls).

Closing Position Orders

Just as important as knowing how to open an options position is understanding how to close one. Whether you’re taking profits, cutting losses, or avoiding assignment, using the correct closing order is crucial—it should match your opening order.

• Sell to Close – This is how you exit positions that you initially bought to open. When you sell to close, you’re giving up your right as an option holder in exchange for the current market value of the option.  For option buyers, it is very unusual for them to actually take assignment of the shares by exercising their options at expiration.  In most cases, they Sell to Close the option and capture their profits through the difference in the price they paid for the options compared to the sale price. 
• Buy to Close – If you previously sold an option, you’ll need to buy to close to exit the position. This is particularly important for short positions where you want to lock in profits or prevent potential assignment. Buying to Close your option is the only way an option seller can ensure against assignment. 

The decision to close a position depends on many factors. In some cases, you may want to simply take profit from a position that increased in value. In other cases, you may want to buy to avoid assignment, roll positions to a different strike price or expiration date, or manage risk ahead of an earnings announcement or FDA decision.

Complex Order Types

Simply opening and closing orders might cover basic needs, but there’s a whole world of more sophisticated order types to help execute advanced strategies more efficiently and often with better pricing.

Straddles are an example of a complex option strategy that involves multiple option orders executing at the same time. Source: Phemex Academy

• Multi-Leg Orders – Think of multi-leg orders as a combo meal—instead of ordering each item separately, you get everything conveniently packaged together at a better price. These orders let you execute multiple options simultaneously, such as buying and selling options of the same time and expiration at a different strike to create a vertical spread or with a different expiration date to create a calendar spread.
• Rolling Orders – Rolling orders can help you adapt to changing market conditions by simultaneously closing an existing position and opening a new one. For example, you might close the current one and open a new one with the same strike and a later expiration to “roll out” the contract, allowing for more time for a thesis to play out.
• Contingent Orders – These are “if-then” orders to help manage risk and automatically execute complex strategies. For example, one-cancels-other (OCO) orders can create and execute automatic take-profit and stop-loss points (e.g., close at a profit of 50% or a loss of 30%). By automating these decisions, you can take the emotion out of trading to improve performance.

The challenge with complex order types is fully understanding the ramifications. Remember to add up all the legs to understand the net cost of the position while analyzing the option profit/loss diagram to understand the aggregate risk and reward. And always ensure that your decisions have a clear rationale (e.g., don’t just roll options to avoid taking a loss).

Order Execution Matters

Choosing the right order type is only part of the equation when it comes to options trading—you may also need to specify how you want the trade to execute. And this can make a big difference to your bottom line depending on the market’s liquidity.

• All-Or-None (AON) – All or none (AON) orders require your entire order to be filled to execute. So, if you are trying to buy to open 1,000 call option contracts at $0.50, but there’s only 500 available at $0.50 and 500 at $0.60, your order will not execute. Without this selection, you might buy 500 in one transaction and then have an open order for the remaining 500 if the ask falls in the future.
• Price Improvement – Not all exchanges are equal. The National Best Bid and Offer (NBBO) is a reference price, but smart routing can help fill orders at the best available price. Different exchanges might have different prices and some brokers may let you choose specific exchanges to trade or automatically find the best price.
• Liquidity – Volume and open interest are essential liquidity indicators to consider before trading options. Look for options with at least 100 contracts of open interest and at least 10-20 contracts in daily volume. And with low-volume contracts, use limit orders to avoid any unexpected prices.

Good execution is often the difference between a profitable trading strategy and a losing one. Take your time, be patient, and don’t let the fear of missing out push you into bad fills. Sometimes, the best trade is one you didn’t make because you couldn’t get a good fill!

The Bottom Line

Understanding order types is more than just knowing the terminology—it’s about having the right tools to execute your trading strategy safely and efficiently. Start with the basics, document your trades, learn from your experiences, and gradually work your way up to more complex order types as your confidence grows.

Of course, you have to find the right opportunities before you even think about order types. Fortunately, optionDash makes it easy to screen for covered calls and cash-secured put opportunities to boost your investment income. Try it today for free!

If you’re just starting with options, you may also want to consider taking our free e-courses covering these order types and everything else you need to know to get started with covered calls, cash-secured puts, and other low-risk strategies. Get started today!