STO means "Sell to Open." It is an options order that creates a new short option position. After the order fills, the seller receives the option premium and accepts an obligation if the buyer exercises and the seller is assigned.
STO Options Trading at a Glance
| Order Type | What It Does | Position Created |
|---|---|---|
| Buy to Open (BTO) | Buys an option to start a position | Long option |
| Sell to Open (STO) | Sells an option to start a position | Short option |
| Sell to Close (STC) | Sells an option already owned | Closes a long option |
| Buy to Close (BTC) | Buys back an option previously sold | Closes a short option |
STO opens a short option position. STC closes a long option position.
How Does Sell to Open Work?
Sell to Open works by creating an option contract that gives the buyer certain rights while giving the seller a contractual obligation.
The obligation depends on the type of option:
- STO call: You may have to sell the underlying asset at the strike price.
- STO put: You may have to buy the underlying asset at the strike price.
A standard equity option usually represents 100 shares. If an option trades at a premium of $2.00, one contract represents about $200 before fees and other adjustments.
STO Call Versus STO Put
| STO Order | Premium Received | Possible Assignment Obligation |
|---|---|---|
| Sell to open a call | Call premium | Sell 100 shares at the strike price |
| Sell to open a put | Put premium | Buy 100 shares at the strike price |
An STO call is often used in a covered call when the trader already owns the shares. An STO put can be used as a cash-secured put when the trader is prepared to buy the shares if assigned.
Example of an STO Put
Assume you submit this order:
- Sell to open 1 XYZ $50 put
- Premium: $1.20
- Expiration: 30 days
If the order fills, you receive about $120 before fees because one contract usually represents 100 shares.
If XYZ falls below $50 and you are assigned, you must buy 100 shares at $50 per share. The premium lowers the effective break-even price to $48.80 per share, excluding fees and other adjustments.
The premium compensates you for accepting the obligation. It does not protect you from a substantial decline in the stock price.
How Do You Close an STO Position?
You normally close a short option created with STO by submitting a Buy to Close (BTC) order for the same option series.
For example:
- You sell to open one XYZ $50 put.
- The put later falls in price.
- You buy to close the same XYZ $50 put.
- Your short option obligation ends if you close the position before assignment.
The closing order must match the underlying asset, option type, strike price and expiration date.
What Are the Risks of an STO Order?
The main risks of an STO order are assignment, losses in the underlying asset and collateral requirements.
- An uncovered short call can have theoretically unlimited loss if the underlying asset rises sharply.
- A short put can create a large loss if the underlying asset falls substantially.
- An American-style equity option can be assigned on any business day before expiration.
- Assignment on a short call can require you to deliver shares.
- Assignment on a short put can require you to purchase shares.
The Options Industry Council states that an American-style option can be assigned at any time during its life, not only at expiration.
STO Versus Shorting Stock
STO creates a short option position, not necessarily a short stock position.
When you sell to open a call, you give the buyer the right to purchase the stock from you at the strike price. You are not automatically short the underlying stock.
When you sell to open a put, you give the buyer the right to sell the stock to you at the strike price.
What Should You Check Before Submitting STO?
Before placing a Sell to Open order, check:
- Whether the option is a call or put
- Strike price
- Expiration date
- Number of contracts
- Premium received
- Maximum potential loss
- Whether the position is covered, cash-secured or uncovered
- Your broker's margin and assignment requirements
- Whether you can accept delivery or purchase of the underlying shares
STO means you are opening an option-selling position. You receive a premium, but you also accept the contract's obligations and assignment risk.