When you sell to open (as opposed to buy to open), you are essentially opening a short option position. And as a reminder, a short option position has nothing to do with which direction you expect the stock (or the market) to trade.
Although not quite as straightforward as buy to open, selling to open is still a relatively simple concept to grasp. The examples below will illustrate.
The most important thing to remember is that selling to open always opens or initiates a new trade. It never closes an existing position. The last thing you want is to accidentally give your broker instructions to open a new short position when what you really wanted was to sell to close an existing position.
Here are three quick examples:
Closing a bull put spread simply requires you to reverse the initial trade. The put you sold to open must be bought to close, and the put at the lower strike that you bought to open must be sold to close.
KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares
Open Market Purchase Price: $20,071.83
Less Booked Option Income: $11,625.47
Tot. Discount: 57.92%
Adj. Div. Yield: 10.18%