Master Options Trading: When To Sell a Put To Open vs. Sell To Close Your Position

Options trading can feel like navigating a foreign language. Two terms that confuse many traders are “sell to open” and “sell to close”—yet understanding the difference is crucial before you execute any trade. Let’s break down what these mean and when you should use each strategy.

Sell To Close: Exit Your Winning (Or Losing) Positions

Sell to close means you’re liquidating an option contract you previously bought. Think of it as closing out a bet you made earlier. When you sell to close, you’re essentially saying: “I want out of this position at today’s market price.”

Here’s the practical reality: selling to close might lock in a profit if the option has appreciated since you purchased it. But it could also result in a loss if the option has declined in value. The outcome depends entirely on market movement between your entry and exit points.

When should you use this? Once your option reaches your target profit level, selling to close secures that gain. Conversely, if an option is hemorrhaging money and shows no signs of recovery, closing the position limits your damage. The key is avoiding emotional panic-selling—always let market fundamentals guide your exit decision, not fear.

Sell To Open: Collect Premium, Play The Waiting Game

Sell to open flips the script entirely. Instead of buying first and selling later, you’re starting by selling an option you don’t own yet. This immediately credits your account with the premium (the option’s price). You’ve now created a short position.

The mechanics work like this: you sell an option contract with a $1 premium, and your account receives $100 in cash (contracts represent 100 shares). Now you’re waiting for one of three outcomes: the option expires worthless (ideal scenario for you), the buyer exercises it, or you buy it back to close the position.

When might you sell a put to open? Traders use this strategy when they’re neutral or slightly bullish on a stock. You collect immediate cash while hoping the put option loses value or expires. It’s income generation via premium collection.

Understanding Option Value: Time And Intrinsic Worth

Why do options have value? Two factors drive this:

Time value represents the possibility that an option could become profitable before expiration. The more time remaining, the higher the time value. As expiration approaches, this value erodes—a concept traders call “time decay.”

Intrinsic value is the immediate profit built into an option. An AT&T call option with a $10 strike price has $5 of intrinsic value when AT&T trades at $15. Below the strike price, call options have zero intrinsic value—only time value remains, which dwindles daily.

Stock volatility also matters enormously. More volatile stocks command higher option premiums because bigger price swings are possible. Conversely, stable stocks have cheaper options.

Call Options vs. Put Options: The Directional Bet

Call options give you the right to buy a stock at a set price. When you sell to open a call, you’re betting the stock price stays flat or falls. If AT&T stays below $25, your short call expires worthless and you keep the premium.

Put options give you the right to sell at a set price. When you sell a put to open, you’re essentially betting the stock price holds steady or rises. Selling a put at a $20 strike means you profit if the stock stays above $20.

Here’s the critical distinction: buying to open creates a “long” position (you hope the option gains value). Selling to open creates a “short” position (you hope the option loses value). These are opposite trades with opposite profit drivers.

Real-World Scenario: How It All Fits Together

Imagine you sell a $100 call option on a tech stock to open. You collect $200 in premium immediately. Three weeks later, the stock has fallen and your option is now worth $50. You sell to close, pocketing $150 profit (the $200 you collected minus the $50 you paid to exit).

Alternatively, you could hold until expiration. If the stock remains below $100, the option expires worthless and you keep the full $200 premium. If the stock jumps to $110, you’re forced to deliver shares at $100—but you’ve still profited after accounting for the $200 premium received.

Covered Calls vs. Naked Shorts: Risk Management Matters

If you own 100 shares of a stock and sell calls against it, you’ve created a “covered” call position. Your risk is capped because your broker will simply sell your shares at the strike price if assigned. You’ve pre-decided this outcome.

Never run “naked” short positions—selling calls without owning the underlying shares. If assigned, you’d have to buy shares at market price and immediately sell them at the lower strike price. Your loss is theoretically unlimited.

The Hidden Dangers: Time Decay, Leverage, And Spreads

Options are riskier than stocks for several reasons. First, time decay works relentlessly against you. An option loses value daily as expiration approaches, regardless of stock price movement. You have weeks, not months or years, for your thesis to play out.

Second, leverage cuts both ways. A $300 investment can return 300% if the trade moves right—but lose 100% if it moves wrong. This isn’t the case with stocks.

Third, the bid-ask spread (the gap between buying and selling prices) is wider with options. You pay this spread twice—once entering, once exiting. On illiquid options, this spread can be brutal.

Before executing your first sell to open or sell to close trade, paper trade with virtual money. Understand how leverage, time decay, and spreads interact before risking real capital. Options demand respect and preparation.