"Sell To Open" a Call or "Buy to Open" a Put when Trend is Bearish

Question

I trade options. I "Buy to Open" and then "Sell to Close". I don't exercise them. I have never traded by "Sell to Open" followed by "Buy to Close", which I don't know when to use.

When stock price declines, a put's premium might not increase due to time decay. But a call's premium would definitely come down.

Here is my understanding on STO/BTC. If wrong, please correct me:

Suppose a BTO call option that expires the next day is $1.00 and the next day, irrespective of stock price move, the premium dropped to $0.30. Could I buy the call for $1.00 and on the next day BTC at $0.30 for a profit of $0.70 ??

Answer 1

A BTO Call option Expires Next Day is $1.00 (Strike Price XXX). Next day irrespective of stock price move, option Premium came down to $0.30 as it expires same day.

So Can I buy the position, "Sell to Open" Call at $1.00, Next day to "Buy to Close" at $0.30 for the profit of $0.70 ??

You wouldn't say you're buying that position, because you are actually selling a contract, but yeah you've got the idea.

When you sell an option contract you get paid a premium (receive a credit) and take on an obligation to buy/sell a certain number of shares (typically 100) at a specific price if the option is executed. Your maximum profit is achieved if the option expires worthless and you get to keep all the premium. As you mentioned you can also buy the contract back to close out your position, if the value has gone down then you can buy it back for less than the credit you received, netting a profit.

An important difference is the risk involved when you are selling options. When you buy to open a position your max loss is the premium you paid, but when you sell to open you can expose yourself to unlimited risk. Be aware that the buyer of your option doesn't have to wait until expiration to execute it. You have to be prepared to handle early assignment. I'd suggest researching things like covered vs naked puts/calls, margin call, and option spreads to start getting a good handle on the risk/reward propositions.

As for the question in your title:

“Sell To Open” a Call or “Buy to Open” a Put when Trend is Bearish

Both are bearish, which is appropriate will vary based on a lot of factors.

Answer 2

When you establish a new option position it is either:

• Buy to Open (BTO) or Sell To Open (STO)

When you close an existing option position it is either:

• Buy To Close (BTC) or Sell To Close (STC)

A closing position cancels an opening position. IOW:

• BTO + STC = no position

• STO + BTC = no position

It is very important that you to understand that uncovered options only offer a small potential reward while leaving you open to large risk. You should not do this unless you are experienced with options and risk management.