Stochastic mechanisms diversify cell fates during development. How cells randomly choose between two or more fates remains poorly understood. In the Drosophila eye, the random mosaic of two R7 photoreceptor subtypes is determined by expression of the transcription factor Spineless (Ss). We investigated how cis-regulatory elements and trans factors regulate nascent transcriptional activity and chromatin compaction at the ss gene locus during R7 development. The ss locus is in a compact state in undifferentiated cells. An early enhancer drives transcription in all R7 precursors, and the locus opens. In differentiating cells, transcription ceases and the ss locus stochastically remains open or compacts. In Ss R7s, ss is open and competent for activation by a late enhancer, whereas in Ss R7s, ss is compact, and repression prevents expression. Our results suggest that a temporally dynamic antagonism, in which transcription drives large-scale decompaction and then compaction represses transcription, controls stochastic fate specification.