Sell to Open vs. Sell to Close: When and How to Use Each Strategy

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If you’re diving into options trading, you’ll likely come across two common terms: sell to open and sell to close. While they may sound similar, these two strategies serve very different purposes — and knowing when to use each is essential for maximizing profits and managing risk.
In this guide, we’ll break down the key differences between sell to open and sell to close, how each strategy works and when to use them in your trading plan.
What Is an Option?
Before comparing sell to open vs sell to close, it’s important to understand what an option is. An option is a contract that gives investors the right, but not the obligation, to buy or sell a stock at a specified price (the strike price) before a certain date.
There are four core option order types:
- Buy to Open
- Sell to Close
- Sell to Open
- Buy to Close
Now, let’s explore the differences between selling to open and selling to close.
What Does “Sell to Open” Mean?
Sell to open is when you create a new option contract and sell it to another trader.
The contract represents your promise that if the stock moves beyond a specific price, called the strike price, you’ll either buy or sell the shares (depending on whether it’s a call vs. put option).
The buyer pays you a premium upfront, but you’ll also have to fulfill the contract terms if the stock hits the strike price and the buyer exercises the option (meaning they take you up on your promise to buy or sell the stock).
Ultimately, you’re taking a short position on the stock, hoping it won’t hit the strike price, so the option expires worthless — then you can keep the premium without having to buy the underlying stock (if it’s a put option) or sell it (if it’s a call option).
When to use:
- You expect the option to expire worthless.
- You want to earn income by collecting premiums.
- You think the market will favor you, so the buyer won’t exercise the option.
- You’re using a strategy called “covered call” (owning the stock and selling a call to collect premiums).
Examples:
- You think the price of Stock ABC won’t go above $25, so you sell to open a call option with a $25 strike price. If the stock stays below $25 until expiration, the option becomes worthless, and you get to keep the premium as a profit. However, if the stock rises above $25, the buyer can exercise the option, and you’ll have to sell them a share at $25, even if the market price is higher.
- Stock XYZ is currently trading at $55 per share, but you want to buy it for $50. You sell to open a put option with a $50 strike price. The buyer of the option now has the right to sell you that stock for $50. If XYZ stays above $50, the option expires worthless, and you get to keep the premium. If it drops below $50 and the buyer exercises the option, you’ll have to buy the shares at that price (which was what you wanted).
What Does Sell to Close Mean?
Sell to close is when you sell an option contract you previously bought to exit the trade.
When you open an options position by buying a contract (called a buy-to-open order), you can later close that position with a sell-to-close order. This means you’re no longer interested in holding the option and want to lock in a profit or cut your losses.
You’re not creating a new option or exercising it — you’re just selling the same contract to another trader.
If you’re new to options trading, you may want to start here since there’s more risk with sell to open vs. sell to close.
When to Use:
- The option has increased in value, and you want to take the profits before expiration
- The trade isn’t working out, and you want to cut your losses before they get worse
- The expiration date is approaching, and the option could lose value due to time decay
- You don’t want to buy or sell the shares by exercising the option
Examples:
- You bought a call option for Stock ABC for $5.00. The stock went up, and now the option is worth $7.00. You sell to close and make a $2.00 profit per share.
- You bought a put option to hedge against a stock dropping in value. However, the price stabilized, and now your option is losing value. You sell to close the option to minimize your losses and retain part of the premium.
Key Differences Between Sell to Open and Sell to Close
While they might seem similar on paper, there are some key differences between the two to keep in mind. Here’s a breakdown of each:
Purpose of Each Action
- Sell to Open: A seller uses this order to initiate a trade by writing a new option and selling it to another trader.
- Sell to Close: A buyer uses this order to close an existing trade from a previously purchased option by selling it to another trader.
Risk and Obligation
- Sell to Open: When you sell to open, you may be required to buy or sell shares of the stock if the buyer exercises the option.
- Sell to Close: Once the position is closed, there aren’t any additional obligations. You’re simply closing out a position you previously opened when you bought the option.
Below is a quick overview of the difference between sell to open vs. sell to close:
Feature | Sell to Open | Sell to Close |
---|---|---|
Purpose | Start a new trade | Exit a trade |
Role | Seller (writer) | Buyer |
Obligation | May have to buy or sell stock if the option is exercised | No additional obligations once the position is sold |
Profit method | Earn money upfront through premiums | Earn money by selling the option for more than you paid for it |
Risk | Very high, especially with uncovered (naked) positions | Fairly low; you could lose the premium you paid to buy the option |
How Selling Options Works in Real-Life Trading
Knowing the in’s and out’s of options is important, especially while trading. Here’s a breakdown of some options to consider:
Scenario 1: Using Sell to Open in a Bearish Market
You think the price of Stock ABC will drop, so you sell to open a call option with a high strike price. The stock doesn’t go up, so the option expires worthless, and you get to keep the premium.
Scenario 2: Using Sell to Close to Lock in Profits
You think the price of Stock XYZ will rise, so you buy to open a call option. The stock price does go up, and your option’s value increases. You sell to close the position and take the profit.
Risks of Sell to Open and Sell to Close
There’s a lot more risk with options compared to stocks. However, buying options is typically safer than selling them. Here are some of the risks with sell to open vs. sell to close:
Sell to Open Risks
- Assignment risk: Since the option you sold promises you’ll buy or sell a stock if it hits a certain price, you’ll have to follow through if you receive an assignment (a notice that the buyer decided to exercise their shares). This could offset the profit from the premium you collected upfront.
- Unlimited loss potential: If the buyer exercises an option and you don’t already owe the stock (meaning your position is uncovered or “naked”), you’ll have to buy the stock at whatever the market price is. Since there’s no cap on how high stocks can go, there’s an unlimited potential for losses.
Sell to Close Risks
- Losing the premium: When you purchase an option, you pay a premium to the seller upfront. If your option expires worthless, you’ll lose the premium and won’t recoup it through the trade.
- Time decay: As the expiration date approaches, options contracts tend to decrease in value since there’s less time for the price to move favorably. This could result in you selling too late and incurring bigger losses or too early and missing out on potential profit.
When to Use Sell to Open vs. Sell to Close in Your Trading Strategy
Timing is everything, especially when it comes to trading. Here are some strategies to consider:
Strategic Uses for Sell to Open
If you want to generate income, you might consider sell-to-open options trading. When you create and sell an option contract, the buyer pays you a premium. As long as the buyer doesn’t exercise the option, the premium is easy profit.
Sell to open is best when you’re neutral or bearish on a stock, meaning you expect the price to either stay the same or go down slightly. Since the option buyer is betting on a significant price movement in the stock, your best-case scenario as the seller is when that move doesn’t happen.
Strategic Uses for Sell to Close
When you buy an options contract, you’re betting the stock will hit a certain price by a specific date. If the stock starts to move in that direction, your option could increase in value. You can then use a sell-to-close order to sell the option to another trader and take the profits.
However, if it looks like the stock won’t hit the strike price, your option could lose value — especially as the expiration date gets closer. At that point, you might sell to close the option to minimize your losses.
Tips for Deciding Which to Use
When deciding between sell to open vs. sell to close, here are some factors to consider:
- Market conditions: Understanding the market could form your strategy. If you’re in a stable or bear market, selling to open could help you generate income through premiums. However, if the market is more volatile, selling to close may be the better option.
- Expiration date: Options tend to lose value as they approach their expiration. When selling to open, contracts with later expiration dates could pay higher premiums since there’s more time for the price to move against you. If you’re the buyer, however, you might consider selling to close an option as the expiration date nears since it could lose value due to time decay.
- Risk tolerance: Sell to open has significant risks, especially if your position is uncovered (meaning you don’t own shares of the stock). On the other hand, selling to close an option is usually a safe investment move since you’re just exiting a trade you’ve already entered.
Final Take to GO: Sell to Open vs Sell to Close
Understanding sell to open vs sell to close is essential for anyone looking to trade options effectively. While both strategies involve selling, they serve very different purposes:
- Sell to open is about creating new contracts and earning premiums.
- Sell to close is about exiting existing positions to realize gains or limit losses.
Before placing either type of trade, assess your risk tolerance, market outlook, and investment strategy. And if you’re just starting out, be especially cautious with sell-to-open trades — they come with more risk and potential obligations.
Whether you’re writing options for premium income or closing a winning trade, knowing the difference between sell to open vs sell to close can make or break your strategy. Always trade with a plan — and keep your risk in check.
FAQs About Sell to Open vs Sell to Close
Here are some common questions and concerns to keep in mind when looking into the pros and cons of sell to open vs sell to close:- What happens when I sell an option to open a position?
- You collect a premium, but if the buyer exercises the option, you have to sell (if it's a call) or buy (if it's a put) the underlying stock.
- Can I sell to close an option before it expires?
- Yes, you can sell to close any time before expiration to take profits or cut a loss.
- How do I know when to sell to open or sell to close?
- One easy way to know if you should sell to open vs. sell to close is to think about whether you want to initiate a trade (sell to open) or exit a trade (sell to close).
- Are there any taxes on profits from selling options?
- Yes, you typically have to pay capital gains tax on profits from options trading. Short-term trades (less than a year) are taxed as ordinary income.
- What should I do if my option trade goes against me?
- If you bought an option and it's losing value, consider a sell-to-close order to limit losses. If you sold an option, you can buy to close the option and exit before losses get worse. Always have an exit plan before beginning a trade.
The information is accurate as of April 17, 2025.
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- Investor.gov "Investor Bulletin: An Introduction to Options"
- Corporate Finance Institute "Sell to Open"
- Corporate Finance Institute "Sell to Close"
- SoFi "Sell-to-Open vs Sell-to-Close: How They're Different"
- Fidelity "How to sell calls and puts"
- MASTT "Everything to Know about Market Condition Risks"