WHAT IS 'Sell To Open'

Sell to open is a phrase used by many brokerages to represent the opening of a short position in an option transaction.

BREAKING DOWN 'Sell To Open'

Sell to open refers to instances in which an option investor initiates, or opens, 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. Options are a type of derivative security.

Selling to open allows an investor to be eligible for a premium as the investor is selling the opportunity associated with the option to another investor within the market. This puts the selling investor in the short position on the call or put, while the second investor takes the long position, or the purchase of a security with the hope that it will increase in value. The investor shorting the position is hoping the underlying asset or equity does not move beyond the strike price, as this allows the investor to keep the stocks and benefit from the long investor's premium.

Put and Call Options

Sell to open can be established on a put option or a call option or any combination of puts and calls depending on the trade bias, whether bullish, bearish or neutral, that the option trader or investor wants to implement. With a sell to open, the investor writes a call or put in hopes of collecting a premium. The call or put may be covered or naked depending on whether the investor writing the call is currently in possession of the securities in question.

An example of a sell to open transaction is a put option sold or written on a stock, such as one offered through Microsoft. In this case, the put seller may have a neutral to bullish view on Microsoft, and would be 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 held by the investor. It is generally used to generate premium income from a stock or portfolio. A naked call, also referred to as an uncovered call, is more risky than a covered call, as it involves establishing a short call position on a stock not held by the investor.

RELATED TERMS
  1. Naked Position

    A naked position is a securities position, long or short, that ...
  2. Call On A Put

    A call on a put refers to a compound option where there is a ...
  3. Naked Option

    A naked option is created when the option seller does not currently ...
  4. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
  5. Put Option

    A put options gives the owner the right to sell a specified amount ...
  6. Option

    Options are financial derivatives that give the option buyer ...
Related Articles
  1. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  2. Retirement

    Write Covered Calls To Increase Your IRA Income

    Covered calls may require more attention than bonds or mutual funds, but the payoffs can be worth the trouble.
  3. Trading

    Naked Options Expose You To Risk

    Find out why these enticing options can spell trouble for your bottom line.
  4. Trading

    Beginner's Guide To Call Buying

    This article focuses on the technique of buying calls and then selling or exercising them for a profit. Learn how to buy calls today.
  5. Trading

    Futures and Options: How Are They Different?

    Options and futures may sound similar, but they are very different. Futures markets are a bit simpler to understand but carry a greater risk for investors.
  6. Trading

    Getting acquainted with options trading

    Learn about trading stock options, including some basic options trading terminology.
  7. Trading

    Bear Put Spreads: An Alternative to Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  8. Investing

    Is it Risky to Invest in Options?

    Investing with options can be a great strategy, but you need to do your research first or the risks can outweigh the benefits.
  9. Investing

    What are Options Contracts?

    An explanation of options contracts, call options and put options.
RELATED FAQS
  1. What is the difference between a covered call and a regular call?

    Learn what a call option is, what two strategies call options can be used for, and the difference between a covered call ... Read Answer >>
  2. When does one sell a put option, and when does one sell a call option?

    An investor would sell a put option if her outlook on the underlying was bullish, and would sell a call option if her outlook ... Read Answer >>
  3. Why are call and put options considered risky?

    Learn why put and call options are considered risky and see how, depending on which side of the contract you are on, you ... Read Answer >>
Trading Center