Sell To Open
Definition of 'Sell To Open'
A phrase used by many brokerages to represent the opening of a short position in an option transaction. Sell to open means that the option investor is initiating or opening an option trade by selling or establishing a short position in an option. This enables the option seller to receive the premium paid by the buyer on the opposite side of the transaction.
Sell to open can be established on a put option or call option or any combination of puts and calls, depending on the trade bias - bullish, bearish or neutral - that the option trader or investor wants to implement.
Investopedia explains 'Sell To Open'
An example of a sell to open transaction would be a put option sold or written on a stock, say Microsoft. In this case, the put seller may have a neutral to bullish view on Microsoft, and is willing to take the risk of the stock being assigned or "put" if it drops below the strike price, in exchange for receiving the premium paid by the option buyer.
As another example, a sell to open transaction can involve a "covered" call or "naked" call. In a covered call transaction, the short position in the call is established on a stock that is held by the investor. It is generally used to generate premium income from a stock or portfolio.
A naked call is riskier than a covered call, as it involves establishing a short call position on a stock that is not held by the investor. As such, it is similar to an outright short position in the underlying stock, with all the attendant risks involved in short selling.