Sell to open vs. sell to close with options trading: A 101 guide

As you progress in your investment journey, you may come across options trading. When you trade in options, you essentially sign a contract that gives you the right, but not the obligation, to buy or sell an underlying asset like a stock. If you plan to sell options, it’s important to understand the difference between sell to open versus sell to close.

As you may guess just by looking at the names, opening sets something in motion, while closing finalizes the process. By that comparison, the difference between sell to close versus sell to open is not unlike the difference between opening and closing a door. However, it’s a bit more complicated because each transaction works in a distinct way and can have implications on your trading decisions.

In this article we’ll cover the key differences between these trades, and why investors engaging in options trading may decide to engage in one versus the other.

How does buying and selling options work?

When you sell options, you are granting the buyer the right, but not the obligation, to buy or sell a stock at a predetermined price before or at a specific expiration date. The buyer pays a premium for this right.

As the seller of the option, you collect the premium upfront and are obligated to fulfill the contract if the buyer chooses to exercise the option, regardless of how the stock is performing at the time of exercise. The premium is yours to keep regardless of the outcome.

Trading in options may be a way to generate income. As a seller, you can collect the premium regardless of how the stock performs. However, options trading can also carry a great deal of risk for sellers. After all, if the stock price goes up, you risk having to sell your stock for less than its potential value. If the price goes down, you may find that you have to buy back the stock for more than it’s worth if you don’t want to lose the stock altogether.

On the buy side of options trading, when an investors buys an option, they are purchasing the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price within a specified period of time.

There are a number of risks to be aware of on the buy side of options trading, including (but not limited to) liquidity risk, time decay risk and volatility risk.

There are two types of options: call and put options, which carry a different significance for options buyers.

Call vs. put options

Most option trades are defined as either put or call options.

What does “sell to open” mean?

When you “sell to open” in options trading, you’re taking on the responsibility that comes with the contract – whether that’s delivering shares or purchasing them – if the trade is exercised. This strategy may be helpful if your goal is to generate income through premiums while anticipating that the options will expire worthless.

How does sell to open work?

As an example, if you think a stock might stay stable or decline slightly, you might sell a call option. You’ll collect a premium in exchange for taking on the risk of being obligated to sell shares if the stock price rises above the strike price.

Types of sell to open options trades

The two common types of sell to open options trades are covered calls and cash-secured puts.

Both methods require an innate understanding of risk tolerance and market conditions. Selling to open isn’t without risk, as you take on certain obligations that require precise planning so you can avoid steep losses.

However, when executed strategically, a sell to open trade may be a useful tool for generating income or hedging another position.

What does “sell to close” in options trading mean?

In options trading, sell to close is the act of selling an options contract that you already hold to exit your position. Think of it as finalizing a trade you previously entered by buying a contract. Once you sell to close, you’re closing out your ownership of that particular options contract.

How does sell to close in options trading work?

When traders buy an option, they have the ability to profit based on its movement. But to realize those gains or cut their losses, they have to sell the option. That’s where the sell to close order comes in.

By selling the contract in this way, traders relinquish their rights to the option but secure gains or limit losses in the process.

Types of sell to close options trades

Sell to close options trades come into play in both call and put options. A trader might sell to close a call option to lock in profits if the underlying stock increases in value, driving up the option’s premium.

They might also sell to close a put option if they wish to profit from a decline in the stock price or adjust their overall risk exposure.

Sometimes, the goal is to capitalize on favorable price movements. Other times, it’s to mitigate loss or reallocate resources to a more favorable opportunity.

Regardless of the intent, sell to close provides an exit strategy.

What are the differences between sell to open and sell to close in options trading?

With the definitions of sell to open and sell to close in mind, let’s break down the key differences between them to help clarify what they entail further.

Purpose of the transaction

A key difference between sell to open and sell to close has to do with the overall purpose of the transaction.

When you sell to open, you’re creating a new position in the options market. In a nutshell, you’re initiating a transaction by selling an options contract. This can apply to selling either a call option or a put option, and doing so makes you the options “writer.” Your goal here is to generate income from the premium paid by the buyer and depending on market conditions, also retain ownership of your stock.

On the other hand, sell to close is the action taken when you already own an option and want to sell it to exit your position. Maybe you’re locking in profits or cutting losses. Either way, the transaction wraps up your involvement with that particular options contract.

Buyer vs. seller role

Sell to open positions you as the seller, or the one writing the option. You’re agreeing to fulfill the buyer’s request if and when the contract terms are met. This transaction requires a bit more flexibility (and risk) – you’re acting to create an obligation.

Sell to close puts you in the seller’s seat because you’re letting go of a position you already hold. It’s like saying, “I’m ready for someone else to take over.”

Obligation vs. neutral outcome

With sell to open, an obligation is involved. For example, if you sell a call option, you’re obligated to sell the underlying stock at a strike price if the buyer exercises the option. This obligation exists for the duration of the contract, so be prepared to meet the terms.

Sell to close, however, is more of a neutral action. You’re not creating an obligation, you’re exiting an existing one. Once your trade is executed, you have no further ties to that contract – end of story.

Timing of action

Timing plays a significant role when it comes to these two trading actions. When you sell to open, it’s typically at the beginning of the trade to put a new position in play. The market hasn’t moved yet, so you’re making assumptions about future outcomes to create the position.

Sell to close, on the other hand, happens at the end of the trade. It usually occurs when the market has shifted, and you’re responding to those movements to either realize a profit or minimize a loss.

Trade objectives

You may decide to initiate a sell to open when your objective includes generating income from the premium. This approach is popular with covered call writers and cash-secured put sellers who anticipate limited pricing movement or want to collect regular premiums over time.

Sell to close reflects specific objectives, like taking profits or reducing exposure. Here, the focus may be capitalizing on favorable market changes or mitigating potential losses before options expire.

Do I sell to open or sell to close?

Now that you understand how sell to open and sell to close works in options trading, how do you decide which one to apply in real-life trades? There’s no blanket answer. Instead, it all comes down to what stage of the trading process you’re in, what your specific goals are and how much risk you’re comfortable taking.

If you’re looking to generate consistent income while taking on a calculated amount of responsibility, selling to open may make sense. For instance, writing covered calls on stocks you already own may help you earn premiums in a relatively low-risk manner. But remember, when you sell to open, you’re assuming the obligations laid out in the contract, whether it’s delivering stock shares or purchasing them at a strike price.

Conversely, you may want to sell to close when you’ve bought an option and either want to cut your losses or secure gains. For example, imagine you paid $1 per share to buy an option, and now it’s worth $5 per share due to market conditions. Selling to close would allow you to lock in that $4 per share gain.

Here’s what to consider in deciding between the two:

Both actions have their place in options trading, and there’s no one-size-fits-all answer. Align your choices with your broader trading strategy, time horizon and market expectations to make informed decisions.

The bottom line

Understanding when to sell to open versus when to sell to close is a foundational skill in options trading. Each is designed for different phases in options trading and reflect specific goals, whether that’s generating consistent income or exiting an investment wisely.

If you’re ready to refine your options trading strategy, understanding these definitions and applications may help you trade with more confidence. If you find yourself needing more guidance, consider speaking with a J.P. Morgan Advisor to create a personalized strategy today.

View Disclosures