Are Buy, Buy to Close, and Buy to Cover the same trade?

[Spaghetti Code]

Sorry for a possibly dumb question, but I'm trying to see if there is any difference between these trade types, aside from helping traders avoid a mistake? For example, if I am long SPY, and I enter a Buy to Close (or Cover), it doesn't seem substantially different than a plain old Buy. I am going to end up with the same number of shares at the end of the transaction, so why bother having separate order types? On the flip side, if I am short SPY, issuing a regular Buy should be the same thing as closing out some or all of my position, possibly even going long. I can't see any practical difference between then, except to help people not make mistakes.


(Also, It seems like BTC and Buy were at one point different, which allowed you to trade possibly both long and short the same security at the same time. However, it seems this has been disallowed, which I have seen called "Short Sell Against the Box").

 

[maxinger]

It depends on the exchange/trading platform.


BUY - it creates a new position (even if you have a short position)
or it closes the existing position

BUY to CLOSE - it closes the existing position

In case of doubt, try with a small quantity first.

 

[TrailerParkTed]

Sorry for a possibly dumb question, but I'm trying to see if there is any difference between these trade types, aside from helping traders avoid a mistake? For example, if I am long SPY, and I enter a Buy to Close (or Cover), it doesn't seem substantially different than a plain old Buy. I am going to end up with the same number of shares at the end of the transaction, so why bother having separate order types? On the flip side, if I am short SPY, issuing a regular Buy should be the same thing as closing out some or all of my position, possibly even going long. I can't see any practical difference between then, except to help people not make mistakes.


(Also, It seems like BTC and Buy were at one point different, which allowed you to trade possibly both long and short the same security at the same time. However, it seems this has been disallowed, which I have seen called "Short Sell Against the Box").

With IBKR “Buy” will cover short or naked positions. Some Online have BTC you use or it turns into a boxed position that creates havoc with buying power.

 

[Spaghetti Code]

In case of doubt, try with a small quantity first.

I had planned to do this, but wasn't sure if it it being allowed was something specific to my broker or not.

BUY - it creates a new position (even if you have a short position)

This is what I guess the core of my question is: aside from tax purposes, there doesn't seem to be a reason to be both long and short the same security at the same time.

Thinking out loud: does Buy to close act differently if there is a pending dividend? i.e. does BTC behave differently after the ex-dividend rate, but before the payable date?

Some Online have BTC you use or it turns into a boxed position that creates havoc with buying power.

Any reason why someone would intentionally do this?

 

[JSOP]

Sorry for a possibly dumb question, but I'm trying to see if there is any difference between these trade types, aside from helping traders avoid a mistake? For example, if I am long SPY, and I enter a Buy to Close (or Cover), it doesn't seem substantially different than a plain old Buy. I am going to end up with the same number of shares at the end of the transaction, so why bother having separate order types? On the flip side, if I am short SPY, issuing a regular Buy should be the same thing as closing out some or all of my position, possibly even going long. I can't see any practical difference between then, except to help people not make mistakes.


(Also, It seems like BTC and Buy were at one point different, which allowed you to trade possibly both long and short the same security at the same time. However, it seems this has been disallowed, which I have seen called "Short Sell Against the Box").

From a programming point of view, I see a majority of platforms will provide different mechanisms for just Buy, Buy to Close or Buy to Cover. Like many has said, Buy is usually reserved for opening a new position regardless whether there are existing position(s) opened or not. Whereas Buy to Close or Buy to Cover would close the existing position(s) and would not open new ones. Usually with instruments where hedging is not allowed, if you already have existing position(s) open, Buy and Buy To Close would result in the same thing, closing the existing position(s).

 

[Spaghetti Code]

Usually with instruments where hedging is not allowed, if you already have existing position(s) open, Buy and Buy To Close would result in the same thing, closing the existing position(s).

I am looking at this from a programming point of view, so the details matter more than they normally would. A tricky case where "Buy closes an open position" and "Buy to close doesn't open a new position" seem to not work together. For example, consider the following series of events:

a) Market Sell to Open 6 shares: [-6 shares balance]
b) Limit Buy to Close 6 shares: [-6 shares balance]
c) Partial fill of BTC 3 shares: [-3 shares balance]
d) Market Buy to Open 3 shares: [0 share balance]
e) Partial fill of BTC 3 shares: [+3 shares]

In this example, the buy in d) did close out an existing position, but the e) step opened up a new position by accident.

 

[JSOP]

I am looking at this from a programming point of view, so the details matter more than they normally would. A tricky case where "Buy closes an open position" and "Buy to close doesn't open a new position" seem to not work together. For example, consider the following series of events:

a) Market Sell to Open 6 shares: [-6 shares balance]
b) Limit Buy to Close 6 shares: [-6 shares balance]
c) Partial fill of BTC 3 shares: [-3 shares balance]
d) Market Buy to Open 3 shares: [0 share balance]
e) Partial fill of BTC 3 shares: [+3 shares]

In this example, the buy in d) did close out an existing position, but the e) step opened up a new position by accident.

Then this is not a platform issue, this is a timing issue. So what you need to do is do some kind of checking before you put in the d) step to make sure there are no positions open of it to evidently close if the instrument doesn't allow hedging and the programming interface doesn't differentiate between buy and buy to close. If the interface does differentiate between the two, the d) step wouldn't be executed.

 

[vanzandt]

I am looking at this from a programming point of view, so the details matter more than they normally would. A tricky case where "Buy closes an open position" and "Buy to close doesn't open a new position" seem to not work together. For example, consider the following series of events:

a) Market Sell to Open 6 shares: [-6 shares balance]
b) Limit Buy to Close 6 shares: [-6 shares balance]
c) Partial fill of BTC 3 shares: [-3 shares balance]
d) Market Buy to Open 3 shares: [0 share balance]
e) Partial fill of BTC 3 shares: [+3 shares]

In this example, the buy in d) did close out an existing position, but the e) step opened up a new position by accident.

f) dial broker
g) say "flatten box".

For real though, it happens all the time. If your software has a chat feature just tell whoever's on the other end to flatten the box. Its no big deal.

I think they changed the rules, but people used to lock in a big gain by boxing it and then riding it into the next tax year when they perhaps thought a more favorable tax situation would exist.

Here's a reason it can still be useful however:

Say you have some crazy stock, like Kodak, its easy to locate shares to short on the way up, but good luck on the way down. What you can do is short the stock when its easy to borrow (on the way up), but at the same time you take the stock long.
You don't get burned on the short side as Kodak goes from $15 to $60 in one day because you're essentially flat.
When you think its peaked, you sell the long and you ride your short all the way down.

 

[TrailerParkTed]

I had planned to do this, but wasn't sure if it it being allowed was something specific to my broker or not.


This is what I guess the core of my question is: aside from tax purposes, there doesn't seem to be a reason to be both long and short the same security at the same time.

Thinking out loud: does Buy to close act differently if there is a pending dividend? i.e. does BTC behave differently after the ex-dividend rate, but before the payable date?


Any reason why someone would intentionally do this?

When your jumbling hundreds of trades its easy to screw up. Switching between going long and shorting errors happen.

 

[TrailerParkTed]

f) dial broker
g) say "flatten box".

For real though, it happens all the time. If your software has a chat feature just tell whoever's on the other end to flatten the box. Its no big deal.

I think they changed the rules, but people used to lock in a big gain by boxing it and then riding it into the next tax year when they perhaps thought a more favorable tax situation would exist.

Here's a reason it can still be useful however:

Say you have some crazy stock, like Kodak, its easy to locate shares to short on the way up, but good luck on the way down. What you can do is short the stock when its easy to borrow (on the way up), but at the same time you take the stock long.
You don't get burned on the short side as Kodak goes from $15 to $60 in one day because you're essentially flat.
When you think its peaked, you sell the long and you ride your short all the way down.

Excellent example by one of the most knowledgeable swing, position and day traders!