Keeping Tabs on Open Interest


Simply put, option open interest is the open number of contracts that remain for an expiration month. This includes contracts that have not been exercised, offset, or expired. This includes contracts that have not been exercised, offset, or expired.

If you sign up to our Watch List, you can see all trades and their open interest to help you make your choices and have a look at our Answer Vault for questions other people have asked about open interest. Option Alpha iTunes Podcast. OI is the outstanding buy or sell position in futures and options contract at the end of each day.

Why open interest matters to you

Open interest measures the total number of options contracts that exist for a particular stock. Open interest increases as more options are traded to open a position.

Open Interest is a term that every futures and options trader comes across. In fact, OI data is very important to find the stock or market direction. A trader in the stock market must be aware of the term. Moreover, by understanding the concept of option open interest the trader can make higher returns. To put it another way, open interest helps in determining the momentum of the market.

In this article, we shall understand the term open interest. What is Open Interest: OI is the outstanding buy or sell position in futures and options contract at the end of each day. The market participants build the outstanding position. In addition, the change in open interest has a direct impact on the stock prices and markets.

The change in OI takes place when a trade is initiated between two parties. Consequently, the open interest increases , decreases or remains the same. Let us take an example and understand how open interest changes. Change in open interest gives an indication in relation to the movement in the price of the stock.

Therefore, let us understand such indications. For traders, open interest is of tremendous importance. To repeat, change in OI helps to understand the movement of stock price. For example, if the OI is increasing, it means the flow of money in the market or stock is increasing. Therefore, it suggests that the current trend in the price of stock i. On the other hand, if the OIis decreasing, it means that the current trend in stock price is over because the market is liquidating.

Even though open interest is the indicator of movement in the stock price. However, the investor should not always rely on it blindly. The OI change can mislead the investors especially when there is some news or event related to the stock.

For example, if the results of a company are expected to be bad, the open interest will rise and the price will fall. However, if the company posts good results then OI can change quickly. In fact, the traders are trapped when sudden reversal takes place.

Therefore, it is recommended that position in stocks at such times be avoided as it can lead to heavy losses. Thus, it becomes very important to put a stop loss in place. Adding more to the above information.

If the company has given poor results as per the expectation of the market, but it has given a positive guidance. Therefore, in this scenario as well the OI can reverse at a rapid pace.

Many times we notice that stocks surge even after giving poor results. This is because of the positive guidance. So there will be less of a price discrepancy between what someone wants to pay for an option and how much someone wants to sell it for. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.

Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

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