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Options Definitions: Open Interest
For a given option, the open interest is the number of
open contracts - either puts or calls - that have not been exercised,
closed or expired on a particular day. While each open transaction has a
buyer and a seller, for the purposes of calculating the open interest,
only one side of the contract is counted. Open interest increases when a
buyer opens a put or call position and, vise versa, it decreases when a
buyer sells/closes a put or call position.
For Example:
| Time |
Trading Activity |
Open Interest |
| Jan 1st |
A buys 1 options and B sells 1
options contract |
1 |
| Jan 2nd |
C buys 5 options and D sells 5
options contracts |
6 |
| Jan 3rd |
A sell his 1 options and D buys 1
options contract |
5 |
| Jan 4th |
E buys 5 options from C who sells 5
options contracts |
5 |
-
On Jan 1 A buys an
option which leaves an open interest and also creates trading volume of
1.
-
On Jan 2 C and D
create trading volume of 5 and there are also 5 more options left open.
-
On Jan 3 A takes an
offsetting position and therefore open interest is reduced by 1, and
trading volume is 1.
-
On Jan 4, E simply
replaces C and therefore open interest does not change, trading volume
increases by 5
Volume and open interest are important indicators in
futures and equities markets.
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