Open Interest (OI) is the number of Options contracts where Sell To Open orders have been issued by Options writers or Buy To Open order have been placed by option buyers. It represents the net transactional activity on a particular option contract where those involved have an interest in the outcome.
If there is a high level of open interest, it implies that the liquidity of the contract will be greater and therefore the Bid-Offer Spread will probably be lower (so it will be cheaper to trade).
Other inferences can be made from an increased level of open interest in a particular Options contract, for example, if the levels increase for calls that are above the money then it might signal an expectation that prices of the Underlying will increase. It is important to note that these are inferences only and some care should be taken before basing speculative decisions on them, but OI can yield some potential clues as to the direction of the market.
Contributed by: Ralph Windsor
If there is a high level of open interest, it implies that the liquidity of the contract will be greater and therefore the Bid-Offer Spread will probably be lower (so it will be cheaper to trade).
Other inferences can be made from an increased level of open interest in a particular Options contract, for example, if the levels increase for calls that are above the money then it might signal an expectation that prices of the Underlying will increase. It is important to note that these are inferences only and some care should be taken before basing speculative decisions on them, but OI can yield some potential clues as to the direction of the market.
External Links
Options Trading Volume And Open Interesthttp://www.investopedia.com/articles/optioninvestor/04/060904.asp
Investopedia article about Open Interest and trading volume.
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