The term Sell to Open, in the world of financial markets, refers to the moment when a trader decides to open a sell "short position" on a given option.
The sale of a financial instrument, especially with reference to derivative instruments, results in the opening of a selling position (or short position).
The short position is contrasted with the buy position (or long position), which, on the other hand, identifies the position of the person who bought the instrument.
When a trader anticipates that the financial instrument he or she has analyzed will lose value, at that point he or she will consider opening a short position on this instrument, or in other words, selling the chosen financial instrument. The word “short” in short trading has nothing to do with how long the investor expects to hold the trade before closing it.
For those trading stocks and not CFD contracts, going short at this point is also related to lending shares from a financial intermediary. These shares are the property of a financial intermediary to whom the investor has lent the shares, its clients, or financial intermediary partners. In general, short selling can be defined as selling a financial instrument that we do not own.
What is the importance of sell-to-open positions?
By opening a bearish position, traders have the opportunity to work within a market not only on the upside, but also on the downside. This allows for greater scope, effectively doubling the investor's chances of trading the assets.
Financial stocks have a generally cyclical price pattern, so when a professional trader realizes that the price of an asset is particularly overvalued, then he or she may decide to open a short position and going in profit if the price of the stock begin to fall back to its true market value.
Unlike short positions, where it is hypothetically possible to earn more than 100 percent of the capital, with a short position the profit limit is 100 percent if the price of the shorted security approaches zero (unless leverage is used).
Going short on Eur/Usd means selling Euros by buying U.S. Dollars, thus betting on an appreciation of the Dollar against the Euro. In this case, the expectation is for a decrease in the value of the exchange rate.
A position will then be opened that targets a decline in price. The trader's view of the market will be bearish.