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What is Open Interest?
Open interest is the total number of outstanding derivative contracts — think options and futures — that have not been settled for an asset.
It essentially describes if capital flows into the options market are increasing or decreasing.
Open interest tells traders how many other traders are interested in a particular stock at a specific strike price and expiration.
High open interest means there are a lot of buyers and sellers participating in the security’s secondary market.
Open interest can suggest whether your order will get filled at a good price on the bid/ask spread or if you will have to pay more to get your order filled.
Open interest is a representation of how many calls and puts investors currently hold at specific strike prices.
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Understanding Open Interest
For those of you who understand how trading works, you might see this as the holy grail of trading options.
Knowing where traders are willing to buy or sell options might seem like a sure way to place your own orders, but it’s not quite that simple.
The open interest on an options tree changes constantly. When an investor buys 20 calls of a stock at a certain strike price, this adds 20 to the open interest at that strike price.
However, the person or group who placed that order for 20 calls could sell them back at any time, decreasing open interest by 20 calls.
So, while you can see the orders at any given time, you cannot know what strategies are being employed and whether it is true interest or merely high-frequency buyers.
Therefore, it’s important to be aware of open interest, but it’s not the end-all-be-all.
It can help you find strikes where there is plenty of open interest, which will help you get filled on your order without too much slippage.
If you want to buy options at a strike with very low open interest, you might end up having to increase the price you pay to find willing sellers.
With higher open interest, more sellers will be willing to sell at better prices closer to the middle of the bid/ask spread, which provides liquidity to the broader market.
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Example of Open Interest
Let’s analyze two examples to see how to use open interest when thinking about options.
The latest closing price of AAPL was $142.65. Let’s say you want to buy calls at $150, expiring in November. The current open interest for the $150 calls is over 78,000, which is extremely high.
Each call will cost between $2.41 and 2.60 with a mid-price of $2.50 per share. With such high open interest, you are more likely to get filled closer to the mid-price of $2.50 because there are many sellers.
Believe it or not, AMZN is representative of a stock with relatively low open interest, though this changes depending on market circumstances.
The latest closing price of AMZN was $3,283.26 per share. If you wanted to buy calls at $3,465, you would see an open interest of only 6.
With a mid-price of $61.75 per share and a range of between $59.15 and $64.35, you will likely have to pay at the top of the range to get your order filled because there are fewer sellers in this secondary market.
Open Interest FAQs
Is high open interest good or bad?
High open interest is a good thing for options traders. This is especially true for retail options traders with relatively small accounts who must place smaller orders. High open interest is viewed as high volume, providing good liquidity and better prices for traders.
What if open interest is high?
If open interest is high, this generally indicates that many investors have a call or put options positions at those strike prices.
What is the use of open interest?
Open interest can be used as a way for options traders to know whether a particular underlying stock has good enough liquidity to get filled at a good price.
Bottom Line: What Is Open Interest?
Open interest is one indicator used to show the volume of calls or puts that are currently open in for an underlying stock.
Open interest is applied to not only a specific stock but also to a specific expiration date and even a specific strike price. Some strike prices might have higher open interest than others.