Sell to Open and Sell to Close: A Comprehensive Guide to "Opening and Closing the Stall" in Option Trading

Option trading may sound rather sophisticated, but it’s not actually that mysterious. Today, we’re going to talk about two common operations: Sell to Open and Sell to Close. These two terms may seem a bit convoluted at first, but once you understand them, you’ll gain more confidence in the option market.

Whether you’re a beginner trying to figure out what they mean or an experienced trader looking to figure out how to use them effectively, this article will explain everything clearly: what they are, how they are different, how much you can gain or lose, and when to use each of them.

What do Sell to Open and Sell to Close Mean?

First, let’s talk about Sell to Open. Simply put, Sell to Open means selling an option that you don’t have in your hand at all, which is like creating a trade “out of thin air”. For example, if you think a certain stock won’t go up, or may even go down, you can sell a call option to someone else and collect some “toll fees”, which is the option premium.

The goal of this move is that when the option expires, it becomes worthless, and you can pocket the premium. In essence, Sell to Open is like opening a new stall to make a little money, hoping that the market won’t cause any trouble.

Now, let’s look at Sell to Close. This is much easier. If you previously bought an option and now think it’s about right, or you don’t want to lose any more money, you sell it to close this trade. For example, if you bought an option and its price has increased, you sell it to make a profit from the price difference; or if you see that you’re about to lose money, you sell it quickly to cut your losses. Sell to Close is like packing up the stall and leaving, either taking the money home or leaving with less loss.

So, what’s the difference between opening and closing positions? It’s actually quite easy to understand. Opening a position is like “starting a business”. For example, Sell to Open is like giving yourself a new job. Closing a position is like “closing the business”. For example, Sell to Close is like clearing the job you have in hand. You can remember it with just two sentences.

What are the Main Differences between the Two?

Both Sell to Open and Sell to Close involve “selling”, but they are very different, mainly in the following aspects:

Sell to Open is like digging a hole for yourself in order to earn the option premium. It’s equivalent to opening a new position, and it’s a short position. You go from having no goods to owing goods, waiting for the market to help you settle this account.

Sell to Close, on the other hand, is like filling the hole you bought before. It’s a long position, and the purpose is to make a profit from the price difference or reduce losses. You go from having goods to having no goods, and the trade ends.

The sources of money are also different. Sell to Open relies on the option premium and the depreciation of the option. For example, when you sell an option and receive the money, you hope that it will be worthless when it expires. Sell to Close relies on the price difference when the option price goes up. For example, if you buy an option and sell it when the price rises, you make a profit from the price difference and leave.

In simple terms, Sell to Open is about writing new options to make a small profit, and Sell to Close is about selling old options to make a profit from the price difference.

How to Judge How Much You Can Gain or Lose

For Sell to Open, you need to clearly understand how much you can gain or lose. The most you can gain is the option premium you receive. For example, if you sell an option and receive a premium of $2, and the option becomes worthless when it expires, you earn this $2.

However, the risk is quite high, especially when selling call options. If the stock price soars, you have to pay out of your own pocket to buy the stock and return it to the other party, and the loss can be unlimited.

This move earns little but is stable, but the potential loss can be terrifying. You need to be brave enough to use it.

For Sell to Close, it depends on luck. How much you gain depends on how much you bought the option for and how much you sell it for. For example, if you bought an option for $3 and it rises to $6, you sell it and earn $3. But if the option price drops, you may lose all your capital, or even end up with nothing.

How much you gain or lose depends entirely on the market, and the risk is determined when you buy the option. Considering the risk, for Sell to Open, you can also set a stop-loss, or set up a hedge as insurance to worry less; for Sell to Close, you have to keep an eye on the market, sell quickly when the price rises, and run quickly when the price drops.

How to Judge Which One to Use in the Current Situation?

When should you use Sell to Open? If you think the stock won’t go up, or may even go down, and you want to make a little money, this move is quite suitable. For example, if a certain stock is currently $100, and you think it won’t rise above $110, you can sell a call option with a strike price of $110 and receive a premium of $2. When the option expires, the stock price is indeed $105, and the option is useless, so you earn $2. As long as the market doesn’t go up or goes down, Sell to Open can earn you some option premium.

When should you use Sell to Close? It’s used when you previously bought an option and want to take the money and leave when the price rises, or want to reduce losses when the price drops. For example, if you bought a call option for $3 and it rises to $6, you sell it and earn $3; or if it drops to $1, you sell it to cut your losses. Make money when the price rises and run when the price drops, that’s what Sell to Close is all about.

How do you judge? It depends on your view of the market. If you think it will go down, use Sell to Open. If you think it will go up or you want to run, use Sell to Close. The bold can use Sell to Open. Although the risk is high, there’s an opportunity to earn the option premium; if you want to be more stable, choose Sell to Close. It’s more flexible, and how much you gain or lose depends on luck.

Explanation with Real-life Examples

How does Sell to Open work? The first investor appears. He judges that the stock price of Tesla won’t break through $300 in the short term, so he chooses the “Sell to Open” strategy.

He sells a call option with a strike price of $320 and receives a premium of $3 per option. When the option expires, the stock price of Tesla closes at $295, and the option becomes invalid naturally. This investor keeps all the option premium as he wishes. After deducting the handling fees, he makes a net profit of $300.

What about Sell to Close? The next is an investor who bets on the price going down. He buys a put option of Nvidia at a price of $5, expecting the stock price of Nvidia to drop in the next few days. Sure enough, a week later, the price of this option rises to $9. He chooses to “Sell to Close” at this time and realizes a profit of $4.

If he hadn’t closed the position in time, with the market rebounding, this floating profit would likely disappear.

Frequently Asked Questions

• What’s the difference between Sell to Open and Sell to Close?

One is to open a new short position to earn the option premium, and the other is to close a long position to earn the price difference.

• What’s the risk of Sell to Open?

The loss can be unlimited, especially when selling call options.

• What’s Sell to Close for?

To make a profit and leave or reduce losses.

• Which platforms can be used for these two operations?

Almost all mainstream brokerage firms and trading platforms support Sell to Open and Sell to Close operations, including but not limited to:

Interactive Brokers

Charles Schwab

Robinhood

Tiger Brokers, Futu Niuniu (suitable for Hong Kong and US stocks)

eToro, TradeStation, etc.

• How is the tax calculated?

For Sell to Open, it depends on the tax on the option premium. For Sell to Close, it depends on the capital gains tax, and the length of time held has an impact on it.

If you want to trade options, it’s very important to find a good platform. Interactive Brokers, TD Ameritrade, Robinhood, etc. are all good, and they can basically handle all the operations. If you want to learn, you can read some basic option trading books, or search for some videos online and practice while learning, and you’ll make progress quickly.

Conclusion: Give It a Try Once You Understand

Sell to Open and Sell to Close, one is to open a new stall to make a little money, and the other is to close the stall to make a profit from the price difference. If you want to earn the option premium, use Sell to Open, but be careful of large losses; if you want to be more flexible, use Sell to Close, and how much you gain or lose depends on the market. Figure out your own thoughts, choose a suitable move, and then find a reliable platform to give it a try. Option trading isn’t that difficult.

When it comes to platforms, I would like to recommend the multi-asset wallet BiyaPay. With this single tool, you can handle transactions in US stocks, Hong Kong stocks, and even deal with digital currencies. The deposit and withdrawal processes are extremely fast. Give it a try for trading and you can easily switch between different markets, along with the worry-free and highly efficient flow of funds. For ordinary people engaging in investment, such a convenient tool can help us seize opportunities more firmly. Why not give it a shot?