If you’re diving into option trading, then you’ve already come in contact with the term, Sell to Open vs Sell to Close. A lot of new option traders get confused between them.
Now, if you’re one of them and don’t know what separates both terms, then this article is just for you.
The main difference between a STO and a STC contract is that for ‘Sell to Open’, you open or start a contract; while on the other hand, you sell or end your contract when you pick ‘Sell to Close.’
In this guide, we’ll make all the differences clear to you.
So, let’s begin.
Option Trading
Before diving into the features and differences between the ‘Sell to Open’ option and ‘Sell to Close’ option, we should take a look into option trading.
An option gives a buyer the right to buy or sell an underlying asset until a specific period and on a determined price, but it doesn’t give the buyer the obligation. So, it’s a contract that gives you the right but not the obligation over an asset to sell to an extent.
An option is related to speculation, high risks, and gamble where buyers take the risk that the price of an asset will improve during his contract period. Meanwhile, the seller gambles that the price will go down and he’ll have profit and his asset back after the time period of the contract.
Types Of Option
There are two types of option trading:
- Call Option
- Put Option
A call option is a sort of option that gives the holder the right to buy a stock, where the put option serves the opposite, so it gives the holder the right to sell the stock.
Option Trading Terms
In the line of option trades, there are four types:
- Buy to Open
- Sell to Open
- Buy to Close
- Sell to Close
Using these terms of trade, you can become a buyer or seller in the option trading market.
‘Sell To Open’ Option
‘Sell to Open’ option is a trade term that refers to selling a short position of a put or call option. By going with STO or ‘Sell to Open’ option, the seller receives a premium paid by the buyer; this puts the seller into a short position and the buyer at a long position.
In this scenario, the seller hopes that the strike price gets lower than the initial price as it will allow them to have their asset and the premium at the same time unless the strike price goes high.
Premium Of ‘Sell To Open’ Option
Option traders consider the STO option when they believe the current strike price of their assent won’t improve during the time of the contract, and as they’ll receive a premium, it’s all more favorable for financial improvement.
The STO option premium is divided into two factors:
- Intrinsic Value
- Extrinsic Value
Intrinsic value depends solely on the worth of your assets, while extrinsic value depends on time and the implied volatility that comes with the contract. So, if more time passes and the volatility increases, then the seller will receive more premium.
‘Sell To Close’ Option
‘Sell to Close’ is an option trade term that refers to closing a long position of an option contract. To put it simply, if you want to close an option contract permanently and sell it off, then you go for STC or ‘Sell to Close’ option.
So, if we try to explain it technically, STC option is put option that you acquire from the buyer, and it serves to close or trade out of a long position.
The Outcome Of ‘Sell To Close’ Option
There can be a total of three outcomes of a ‘Sell to Close’ option:
- The contract expires, and the option becomes worthless. When you are going for STC if your option isn’t bought, and your contract expires then the value of the asset becomes zero.
- The contract gets exercised.
- The contract gets sold depending on its value of the current market position. If its price is higher than when it was bought, then it becomes a profit to the seller.
‘Sell To Open’ Vs ‘Sell To Close’: A Feature-By-Feature Comparison
Let’s get into the key differences between the two.
Contact Position
When it comes to ‘Sell to Open’ contracts, you go to a short position contact while you take a premium.
On the other hand, if you go for ‘Sell to Close,’ then you’re going into a contract where you want to permanently close a long position contract.
Premium
For the STO option, the premium comes from the time duration and the lower price stake of the asset for the contract period.
But when you go for the STC option, then you’ll receive a premium once you’ve successfully sold the asset to someone else, and also, you won’t have any right of the said option or asset.
Obligation over Asset
If you use the ‘Sell to Open’ term, then you’ll have your hold over the asset after the contract time is over. Where you’ll lose any sort of obligation over your asset after your contract is complete if you go with the ‘Sell to Close’ route.
Selling Reason
If you are going for ‘Sell to Close,’ then your primary reason is that you believe the current strike price will be lower in the upcoming days or until the end of your contract.
On the other hand, people who want to end their option contract for their current asset permanently or move on to other assets pick ‘Sell to Close.’
Conclusion
‘Sell to Open’ and ‘Sell to Close’ are trade terms that you need to use depending on the condition of your assets. Taking high risks and making the proper predictions are the key to success when it comes to option trading.
We hope you now have a better grip over Sell to Open vs Sell to Close debate, and if you do so, then make the right decisions and own the option trading market!
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