Options Trading Must Read: Sell to Enter a Position vs Sell to Close Position, One Article to Resolve

Many Options newbies are confused by these two concepts: Sell to Open and Sell to Close. Simply put, one is Enter a Position and the other is Close Position.

Core Differences

Enter a Position: You actively sell an Options contract, and the account is credited immediately (premium); at this point, you are in a short position, betting that this contract will depreciate.

Close Position: You previously bought Options, and now you're selling it to close the position. Whether you make a profit, break even, or incur a loss depends on the selling price vs the buying price.

For example

Assuming AT&T's current stock price is $15:

• You Enter a Position to sell one $10 call Options, receiving $500 in premium.
• If AT&T is still below $10 on the expiration date, the Options expire worthless, and you make a huge profit.
• But if AT&T rises to $20, you will be forced to “cut your losses” and sell 100 shares at $10.

Key Concepts: Time Value vs Intrinsic Value

Options price = Intrinsic Value + Time Value

• Intrinsic Value: How much can be earned with immediate execution (for example, $10 options, stock price $15 = $5 intrinsic value)
• Time Value: The further away from the expiration date, the more valuable it is, as there is a greater range for change, and the higher the volatility, the more expensive the premium.

As the expiration date approaches, the time value decays rapidly—this is the power of time decay (Theta).

Three Closing Methods

After selling and entering a position, there are three paths:

1. Close Position: Buy back the Options, ending the position
2. Options Expiration: If the stock price does not exceed the strike price by the expiration date, the options become worthless, and you keep the premium.
3. Exercised: If the stock price exceeds the strike price, you have to fulfill your obligation (cut losses and sell the stock)

Risk Warning

The charm and risk of Options lie in leverage:

• Small investments can multiply several times.
• But time decay will quickly eat away at profits.
• Naked Short Selling (short selling without corresponding stocks) carries extremely high risk — losses are unlimited when stock prices surge.

Newbie Advice: Start by practicing with a demo account to understand the impact of leverage, time decay, and volatility on Options prices before using real money.