What Is Sell to Open in Trading?
“Sell to open” is a trading strategy in which an investor sells a financial instrument, such as a stock, bond, or options contract, to open a new short position in the market. This strategy, also frequently referred to as going short or selling short, is used by investors who believe that the price of the underlying asset will decline, and want to profit from that decline.
Types of Sell to Open Trades
There are several types of “sell to open” trades in trading, including:
- Short selling stocks: An investor can sell short a stock by “selling to open” a position. This means they borrow shares from a broker, sell them at the current market price, and hope to buy them back at a lower price in the future to make a profit.
- Short selling put options: An investor can also “sell to open” a position in put options, which give the buyer the right to sell a stock at a certain price on or before a certain date. The seller receives a premium for selling the option and hopes that the stock price will not fall below the option’s strike price, so the buyer will not exercise their option.
- Short selling call options: Another way to “sell to open” is by selling call options, which give the buyer the right to buy a stock at a certain price on or before a certain date. The seller receives a premium for selling the option and hopes that the stock price will not rise above the option’s strike price, so the buyer will not exercise their option.
- Short selling futures contracts: Futures contracts are agreements to buy or sell an asset at a future date and price. An investor can “sell to open” a position in a futures contract, which means they sell a contract at the current market price with the expectation that the price will decline in the future, and they can buy it back at a lower price to make a profit.
How to Sell to Open
Here are the steps involved in executing a “sell to open”, or sell short, trade:
- Find a broker: The first step is to find a broker to open a margin account, as this is the only type of account in which you can sell to open, or sell short. Not all brokers, including discount brokers like Robinhood for example, offer margin accounts. Additionally, you will need to ensure that your margin account has the proper permissions to sell to open.
- Choose a financial instrument: The next step is to choose a financial instrument that you want to sell short, such as a stock, bond, or options contract.
- Determine the price: Determine the price at which you want to sell short the financial instrument. You can do this by reviewing market data and conducting technical and fundamental analysis.
- Place the sell order: Place a “sell to open” order with your broker. This will instruct your broker to sell short the financial instrument you have selected at the specified price.
- Monitor the trade: Monitor the trade to ensure that your sell order is executed and that you have received the proceeds from the sale.
Once the “sell to open”, or sell short, trade is executed, the investor has opened a new short position in the financial instrument, which means they have sold the asset they do not currently own, hoping to profit from the price decline.
Sell to Open vs. Sell to Close
“Sell to open” involves opening a new short position by selling an asset the investor does not currently own, while “sell to close” involves closing out an existing long position by selling an asset the investor already owns.
The Bottom Line
Overall, “sell to open” is a common trading strategy used to open a new short position in the market. It’s important to remember that short selling involves higher risks compared to buying long positions, as the price of the underlying asset can rise indefinitely and lead to losses. Investors should carefully consider their investment goals and risk tolerance before executing any trades.
