Open interest in options refers to the total number of outstanding option contracts that have not been settled or closed. These are contracts that are currently active—meaning they have been opened but not yet exercised, expired, or offset by closing trades. Key points about open interest in options:
- It represents the number of open contracts held by traders in active positions.
- Open interest increases when new option contracts are created (opened) and decreases when existing contracts are closed or exercised.
- It provides insight into the liquidity of an option; higher open interest often means more liquidity, making it easier to buy or sell the option.
- Changes in open interest, when analyzed alongside price and volume, can reveal market sentiment and help confirm trends. For example, rising open interest with rising prices may indicate bullish sentiment and growing market participation.
- Open interest is distinct from volume; volume is the number of contracts traded in a given period, while open interest is the number of contracts that remain open at a point in time.
In summary, open interest is a vital metric in options trading that shows how many contracts remain active and serves as an indicator of market activity, liquidity, and participant interest in a specific option or options market. It does not predict price direction on its own but provides valuable context for trading decisions. This explanation is based on authoritative sources such as Investopedia, OptionCharts, and tastylive.com.
