Options Open Interest

Open Interest Options Meaning

6 min read

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

Open interest is the total number of options traders hold at the end of the day. You can also define it as the number of options contracts that have not 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 of this.

Volume gives you the strength of market direction. Options volume and OI work together. It’s important to look for high OI when trading. 

Look at open interest relative to the volume of contracts traded that day. If the oil exceeds volume on a trading day, it tells you that the trading option was popular that day.

Another thing I can tell you is the liquidity of the option. If an option has a big OI, it means there are 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 for you. We can’t stress enough the importance of paper trading options.

Trend Confirming

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

That can mean going up, down, or sideways. If OI is declining, know that a trend is ending. The market is liquidating.

A leveling off of OI lets you know the market can no longer sustain the trend. A correction or reversal is coming. Knowing how to write and 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. Meanwhile, a decrease or increase in price when OI stays the same tells you a trend reversal is coming.

Use this information when buying or selling a call or put.

Options Open Interest Example

Open Interest Options Example

This is an example of open interest in an options chain of large-cap stocks. You’ll notice the strike price, stock symbol, bid and ask spread, expiration date, and volume. There is typically a higher open interest on large-cap vs small-cap stocks because they are heavily traded. This makes it easier for traders to get in and out of the trade. You’ll see the bid and ask spread on these stocks is pretty close.

TRV OI Example

Options Open Interest TRV

This is an example of an options chain of $TRV on the ThinkorSwim platform. Notice that the OI on the 49-day expiration is very low. Only one strike price has 100 OI. The 21-day expiration date has a more consistent OI ranging from 200 to 600. Low OI can be hard to get in and out of an options contract because the bid and ask spread is too wide. This is what causes a bad fill price many times. That’s why trading highly liquid options with a tight bid/ask spread is important.

TRV Chart

TRV Chart

Here is a daily chart of $TRV. You’ll notice that the price has been trading in a range for several weeks. This can affect open interest in the future due to the indecision of price action. The existing pattern could be a head and shoulders, double top, or cup and handle breakout. So, this setup could be either bullish or bearish, which affects the OI overall.

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Final Thoughts on Open Interest Options

Price action has a lot to do with options’ open interest. An increasing OI shows a bullish trend; price action can tell more.

If price action increases but OI falls, shorts are covering their positions. Sellers covering their positions is causing a short-term rally. This is a bearish sign and means money is leaving.

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

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

If you need more help, take our options trading course.

Frequently Asked Questions

Open interest is the amount of open options contracts for a particular security.

Volume and open interest options are different but share an important relationship. When you use open interest and volume together, volume tells you the total number of shares or options contracts that changed hands in one day. The more options traded, the higher the volume. We can expect the existing trend to continue when there's more volume.

Higher open interest is typically 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 the trend right to get lower entries and more potential contracts.

The advantage of open interest is the amount of interest for a particular options contract, which could help a trader gauge which expiration and strike to choose when options trading.

High open interest is typically more reliable than low open interest. It's not completely reliable but can be helpful when trading options contract.

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