What Is Sell to Open?
Sell to open is a phrase used by many brokerages to represent the opening of a short positionin an options or other derivatives transaction.
Key Takeaways
- Sell to open is the opening of a short position on an option by a trader. The opening enables the trader to receive cash or the premium for the options.
- The call or put position associated with the option may be covered, in which the option owner owns the underlying asset, or naked, which is riskier.
Understanding 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 ofderivative 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 them to keep the underlying security 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 transactionis 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 bewilling to take the risk of the stock being assigned, or put, if it drops below the strike pricein 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 calltransaction, the short position in the call is established on a stock held by the investor. It is generally used to generate premium incomefrom a stock or portfolio. A naked call, also referred to as an uncovered call, is riskier than a covered call, as it involves establishing a short call position on a stock not held by the investor.
Example of Sell to Open
Suppose trader XYZ thinks that stock ABC's price will go down in the coming weeks. Then XYZ opens a Sell to Open position on ABC's call options. This means that the trader is speculating on a downward move for ABC's price and selling its call options to the market maker, who has bet that ABC's price will go up. Opening the short position enables XYZ to collect premiums on ABC's call options.
FAQs
Sell to open is the opening of a short position on an option by a trader. The opening enables the trader to receive cash or the premium for the options. The call or put position associated with the option may be covered, in which the option owner owns the underlying asset, or naked, which is riskier.
What is an example of a sell to open call option? ›
Example of Sell to Open and Option Premium
Question: Tim thinks that Company A's stock price will decrease in the near future. What type of options contract and type of trade order would be appropriate to profit from this speculation? Answer: Tim should initiate a sell to open trade order on call options of Company A.
What is an example of selling a put option? ›
Here's a simple example: Assume Company XYZ's stock is trading at a price of $50 and you sell three-month puts with a strike price of $40 for a premium of $5. Let's say you sold 10 put contracts and you collect $5,000 in option premium ($5 × 100 shares × 10 contracts) because each put contract covers 100 shares.
How to make money on sell to open put? ›
For a put seller, if the market price of the underlying stocks stays the same or increases, you make a profit off of the premium you charged the seller. If the market price decreases, you have the obligation to buy back the option from the seller at the strike price.
What is an example of an OTM call option? ›
Let us take an OTM call option example. Consider a trader who has a 250 ITC January 20 call option, which entitles them to buy ITC stock at ₹250 per share once the contract expires. If the stock price is less than ₹250, let's say at ₹220, this call is termed out-of-the-money.
What happens when I sell to open a put option? ›
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.
What is an example of a call and put option? ›
Put and call options are financial contracts granting the right to sell (put) or buy (call) an asset at a predetermined price within a specified period. For instance, in the Indian market, an investor buys a call option for shares of XYZ Ltd. at Rs. 100 per share, expiring in one month.
Which option strategy is most profitable? ›
1. Bull Call Spread. A bull call spread strategy is driven by a bullish outlook. It involves purchasing a call option with a lower strike price while concurrently selling one with a higher strike price, positioning you to profit from an anticipated gradual increase in the stock's value.
Why would someone sell a put option? ›
Traders would sell a put option if they are bullish on the asset's price and sell a call option if they are bearish on the price. "Writing" refers to selling an option, and "naked" refers to strategies in which the underlying security is not owned and options are written against this phantom security position.
How to close sell to open put option? ›
Selling put options: If an investor has “sold to open” a put option position and the stock price has not fallen below the option's strike price, they can “sell to close” the position by buying back the option at a lower price or letting it expire worthless.
For instance, 1 ABC 110 call option gives the owner the right to buy 100 ABC Inc. shares for $110 each (that's the strike price), regardless of the market price of ABC shares, until the option's expiration date.
What is in the money call option with an example? ›
In the following example of Nifty, the In-the-money call option would be any strike price below Rs. 8300 (spot price) of the stock (i.e. Strike price< Spot price). So, NIFTY FEB 8200 CALL would be the example of In-the-money call. An In-the-money option always has some Intrinsic value and Time value.
What is an example of a put option out-of-the-money? ›
Example 2: Put Option
In another scenario, if a stock is trading at Rs. 70, and an investor has a put option with a strike price of Rs. 60. Here, the market price being higher than the strike price renders this put option OTM.
What is an example of a buy to open option? ›
Suppose a trader has done some analysis and believes that the price of XYZ stock will go from $40 to $60 in the next year. The trader could buy to open a call for XYZ. The strike price might be $50 with an expiration date about a year from now.
What is an example of a call option sale? ›
Example of Selling Call Options
For instance, there is a stock ABC trading at 1,000 per share. You could sell a call on that stock with a 1,000 strike price for 200 with expiration in eight months. One contract would give you 20,000 (this is 200*1 contract*100 shares).
What is the difference between buy to open and sell to open calls? ›
Buy to open indicates a “long” position in which the trader holds the option in the account and seeks to profit from a rise in the option's value. Sell to open is the opposite, in which the trader collects cash from a sale and waits for the option to lose most or all of its value.
