Open Interest

Open Interest is the number of long or short contract that has not been exercised, closed out, or allowed to expire. Open interest acts more of an information item than an indicator.

Open interest increases whenever a new contract is created. when a buyer initiates a long position or a seller initiates a short position. Open interest decreases whenever an existing contract is closed.

Open interest shows how liquid the specific option’s contract is. If the open interest is very low, the option is considered to be ‘illiquid’, which also means it will usually be a wide spreads between the bid and ask and possibly very difficult to close the option out. The greater the open interest, the more confidence the trader can have that it will be simple to get into and out of a trade with that option.

We can study the volume analysis with open interest to find out the flow of money into and out of the market. The theory is that rising volume and rising open interest confirm the direction of the current trend, and that falling volume and falling open interest signal that the current trend may be ready to reverse.

Therefore, it never hurts for any trader to check the open interest before entering any kind of options trade and that large volumes are your friend in options trades.