What is Sell to Open vs. Sell to Close?

Apr 16, 2022

Reading time: 6 min

It’s common to hear about options Sell to Open vs. Sell to Close in the trading world, but what is the difference between them? In this article, we will provide some examples and also explore the meanings of Sell to close vs. Sell to Open. By the end, you should have a better understanding of when to use each term in your trading journey.

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Sell to Open and Sell to Close – what does that mean?

Sell to Open a position is when you are opening a new trade by selling an options contract. It means that you are obligated to sell the underlying security at the strike price if the option is exercised by the buyer. Selling to open is how you can initiate most options trades.

Sell to Close a position is when you are closing an existing trade by selling an options contract at the current market price. This order type is how you should exit most options trades. It can be done for a number of reasons, such as taking profits, cutting losses, or closing out a position before expiration.

The difference between Sell to Open and Sell to Close

The key difference between Sell to Open and Sell to Close is that the first creates a new position, while the second closes an existing position. When traders sell to open, they are selling the option in hopes of buying it back at a lower price so they can realize a profit. When they sell to close, it means selling the option to exit their current position.

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If you are new to options trading, then it is important that you understand the difference between these two orders. If you mistakenly enter a Sell to Open one when you meant to enter a Sell to Close order, it could have disastrous consequences.

Trading call options

When trading call options, traders have two choices: Sell to Open vs. Sell to Close. Both choices have different implications and should be carefully considered before making a trade.

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Sell to Open means that traders is selling the option in order to open a position. This is typically done when they believes that the asset price will go down. If it goes down, then the option will be worth less than what was paid for it, and traders will get a profit. However, if the price goes up, then the option will be worth more than what was paid for it, and traders will incur a loss.

Sell to Close means that traders are selling the option in order to close an existing position. This is typically done when they believes that the asset price will go up. If it goes up, then the option will be worth more than what was paid for it, and traders will make a profit.

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Trading put options

When the trader puts Sell to Open vs. Sell to Close, it means the right to sell a security at a specified price on or before a certain date.

In this case, the buyer is shorting the underlying asset, betting that its market price will fall below the strike one in the option. If so, they can buy the asset at a lower price and then sell it to a market participant, who is obligated to buy it at the higher, agreed strike price.

The put seller is taking the other side of the trade, betting the market price won’t fall below the one specified in the option. For this, the seller receives a premium from the buyer.

To open vs. to close

The main difference between Sell to Open vs. Sell to Close is that the first is initiating a position that is short, either a call or a put, while the second is closing the put or call option previously sold.

In other words, with a Sell to Open (vs. Sell to Close) order, you are selling the security first in hopes of being able to buy it back at a lower price later. In the second case, you already have a short position and are looking to exit it by selling the security.

Note! A short put is actually a long position in the underlying market because put options rise in value as the underlying price declines.

FAQs

To help you finally understand the topic, we have answered the frequently asked questions of beginner traders.

Is option trading suitable for beginners?

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If you’re new, you might be wondering whether or not the Sell to Open vs. Sell to Close put option is a good idea to start trading. The answer to that question depends on a few factors, including your level of experience with financial markets and your investment goals.

If you’re a complete beginner, then it’s probably not a good idea to start trading options right away. They are complex financial instruments and can be difficult to understand and trade successfully. If you’re just starting out, it would be better to first learn about the basics of investing in the stock market before trying to trade options.

On the other hand, if you already have some experience with financial markets and are looking for a way to potentially earn more, then it could be a good idea. Options offer the potential for higher returns than simply buying and holding stocks, but they also come with more risk. So, if you’re experienced and comfortable with taking on more risk, then trading options might be good for you.

Can I lose buying a call?

When buying a call, the breakeven price is the call’s strike price plus the one paid for it, i.e., the premium. For instance, if a $25-strike call is trading at $2.00 when the asset price is at $20, the security would have to rise above $27.00 before it expires to break even. Otherwise, the trader will lose up to $2.00 paid for the contract.

The bottom line

Now that you understand what Sell to Open is vs. Sell to Close, it’s time to put that knowledge into practice. If you’re looking to enter a new position, use the first option. And if you want to get out of an existing position, be sure to use the second. Choosing the wrong order type could cost you dearly, so it’s important to be aware of the distinction.

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