Options Open Interest Explained

Open interest options (OI) are a very critical component to pay attention to on an options chain. OI shows the amount of contracts that are currently open on a particular stock. It shows the amount of liquidity to be able to get in and out of the trade. Avoid trading options contracts with less than 100 open interest. Ideally, you want to trade options that have at least 1000 open interest or more because they are more liquid to trade. The higher the open interest the better. Watch our video on how to find open interest.

What is Open Interest in Options (OI) With Example?

  • Here’s what open interest in options means with example:
  • OI is the total number of open options contracts.
  • Look for high OI when trading. Minimum 100 contracts, ideally 1000+.
  • Example: $DIS: OI = 4317 & $DIS OI = 38.
  • More open contracts at 4317 then at 38, which equals more interest.

What is open interest options? OI shows the amount of open options contracts. It’s a major component when looking to purchase an options contract. The video above shows how to find OI on an options chain and goes over its importance when trading options. 

OI options are the total number of options held by traders at the end of the day. You can also define it as the number of options contracts that haven’t expired or been exercised.

With stocks there’s a set amount of shares being traded. Options are different because people can write their own options contracts.

OI lets you know the shares that have been traded but are still open. Volume is also an important component to this.

Volume gives you the strength of market direction. Options volume and OI work together.

Basics of Open Interest Options

open interest options

OI is something traders don’t pay much attention to. It may not affect the options price or volume but it provides important information. The information it provides is something to consider when purchasing an option.

Look at OI relative to the volume of contracts traded that day. If the oi exceeds volume on a trading day it tells you trading that option was popular that day.

Another thing oi can tell you is the liquidity of the option. If an option has a big OI it means there’s a lot of buyers and sellers.

This increases the odds of getting your orders filled at a good price. The bigger the oi the better the bid ask spread will be for you. We can’t stress enough the importance of paper trading options.

Trend Confirming

OI confirm trends. When open interest increases you know new money is flowing into the market. A result of increased open interest means the present trend continues.

That can mean is going up, down or sideways. If OI is declining, you know that a trend is coming to an end. The market is liquidating.

A leveling off of OI is letting you the market can no longer sustain the trend. A correction or reversal is coming. Knowing how to sell options is key.

An increase in price and oi confirms an upward trend while a decrease in price and OI confirms a downward trend. While a decrease or increase in price when OI stays the same tells you a trend reversal is coming. 

What is the Difference Between Volume and Open Interest?

Volume and open interest options are different but share an important relationship. When you use open interest and volume together, volume is telling you the total number of shares or options contracts that changed hands in one day.

The more options traded the higher the volume. When there’s more volume we can expect the existing trend to continue.

You can use this information when you’re buying or selling a call or put. We teach you how to trade options live each day in our trading rooms. Take our free courses if you need more stock training.

Price Action

Price action has a lot to do with OI options. Just like increasing price action with increasing oi shows a bullish trend; price action can tell more (check out our stock market basics page).

If price action is going higher but OI is falling, shorts are covering their positions. Sellers covering their positions is causing a short term rally. But this means money is leaving so that’s a bearish sign.

If price action is down but open interest is rising, a trader will know that new money is coming into that sector or market. This is because there are new short sellers.

OI coupled with price action can tell you a lot about trends. Use the volume and OI trading strategy to find bullish or bearish plays.

Unusual Options Activity
We like to scan using barchart to find high volume and changes in open interest in our favorite stocks. Here are the stocks with the highest change in open interest for 9-18-2020

Is High Open Interest Good or Bad?

Is high open interest good or bad with options? Typically higher open interest is good because it signals more interest in that particular strike price, which also means it’s easier to get in and out of the trade. However, sometimes lower open interest might be a good fit if you have trend right to get lower entries and more potential contracts.

Bottom Line on Open Interest Options

OI confirming indicator. You don’t need a chart to use this indicator to confirm a trend. Although a chart is going to give you much more information. You can use it whether you’re swing trading or day trading options. Take our options trading course to learn more. 

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