Open Interest Options: Meaning, How It Works, and Examples (2024)

Open interest options (OI) are a critical component to pay attention to on an options chain. OI shows the number of contracts currently open on a particular stock. It shows the amount of liquidity to get in and out of the trade. Avoid trading options contracts with less than 100 open interest. Ideally, you want to trade options with at least 1000 open interest or more because they are more liquid to trade—the higher the open interest, the better.

It is the total number of options traders hold at the end of the day. You can also define it as the number of options contracts that have not expired or been exercised.

With stocks, there’s a set amount of shares being traded. Options are different because people can write their own options contracts.

What is Open Interest (OI) in Options?

Open interest lets you know the shares that have been traded but are still open. Volume is also an important component of this.

Volume gives you the strength of market direction. Options volume and OI work together. It’s important to look for high OI when trading.

Look at open interest relative to the volume of contracts traded that day. If the oil exceeds volume on a trading day, it tells you that the trading option was popular that day.

Another thing I can tell you is the liquidity of the option. If an option has a big OI, it means there are a lot of buyers and sellers.

This increases the odds of getting your orders filled at a good price. The bigger the oil, the better the bid-ask spread for you. We can’t stress enough the importance of paper trading options.

When open interest increases, you know new money flows into the market. A result of increased open interest means the present trend continues. OI helps confirm trends.

That can mean going up, down, or sideways. If OI is declining, know that a trend is ending. The market is liquidating.

A leveling off of OI lets you know the market can no longer sustain the trend. A correction or reversal is coming. Knowing how to write and sell options is key.

An increase in price and OI confirms an upward trend, while a decrease in price and OI confirms a downward trend. Meanwhile, a decrease or increase in price when OI stays the same tells you a trend reversal is coming.

Use this information when buying or selling a call or put.

Options with low open interest can be more illiquid. Unfortunately, this could be challenging when you want to exit your position. Hence, traders should be cautious about trading options with low OI. It likely will be harder to find counterparties to take the opposite side of a trade when you’re trying to close your position.

It’s important to note that low open interest alone does not mean the option is worthless. Traders should consider other factors, such as the fundamental and technical analysis of the underlying security, before making trading decisions. We can teach you all this in our manyfreecourses at Bullish Bears.

No, you cannot sell an option contract with no open interest. Open interest refers to the number of open positions or outstanding contracts in a particular option. It represents the number of contracts that have been created but have not been closed or exercised.

If there is no OI in a specific option contract, market participants have not established or actively held contracts. In such a scenario, there would be no existing buyers or sellers for that particular option contract, making it hard to execute a trade.

To effectively sell or buy an option contract, there needs to be a counterparty available in the market who is willing to take the opposite position. Without open interest, the option lacks liquidity. Consequently, this can result in wider bid-ask spreads and higher transaction costs.

It is important to understand that open interest can fluctuate throughout the trading day due to new or existing positions being closed and for these reasons, checking OI levels before trading option contracts is smart to ensure sufficient liquidity for ease of execution.

Market makers, specialists, and high-frequency trading firms are some of the participants who provide liquidity for options trading. These entities ensure sufficient buying and selling interest in options to maintain an orderly market.

The option exchanges list minimum requirements that the market maker must follow (quote width, minimum number of contracts offered, etc.). You may not like the price he offers or the number of contracts available at that price. As a solution, you place a limit order at your desired price, which goes on the order book. For your order to execute, it would require a willing counterparty to take the other side of the trade at your price (trader or market maker).

• Open interest is the number of open positions or outstanding contracts in a particular option.
• High OI means many outstanding or open contracts for a specific option contract. In other words, there’s a lot of interest in the option.
• Without open interest, the option lacks liquidity.
• Options with low OI tend to have lower liquidity, which means fewer buyers and sellers may be available for those contracts and wider bid/ask spreads.
• It is always wise to check the open interest levels before buying or selling option contracts.
• You cannot sell an option contract with no open interest.

Price action has a lot to do with options’ open interest. An increasing OI shows a bullish trend; price action can tell more.

If price action increases but OI falls, shorts are covering their positions. Sellers covering their positions is causing a short-term rally. This is a bearish sign and means money is leaving.

If price action is down but open interest is rising, a trader will know that new money is coming into that sector/market because there are new short sellers.

OI, coupled with price action, can tell a lot about trends. Use the volume and OI trading strategy to find bullish or bearish plays.

If you need more help, take our options trading course.