If you later wanted to repurchase the options, you would enter a transaction to buy to close.

Why Open Interest and Trading Volume Matter to Options Traders

Open interest would then decrease by Not all transactions are counted in open interest. For example, if you are buying 10 of the ABC calls to open and you are matched with someone selling 10 of the ABC calls to close, the total open interest number will not change. When you are looking at the total open interest of an option, there is no way of knowing whether the options were bought or sold. That's probably why many options traders ignore open interest altogether. However, you shouldn't assume that there's no important information there. One way to use open interest is to look at it relative to the volume of contracts traded.

When the volume exceeds the existing open interest on a given day, it suggests that trading in that option was exceptionally high that day. Open interest also gives you key information regarding the liquidity of an option.

If there is no open interest in an option, there is no secondary market for that option. When options have a significant open interest, it means there are a large number of buyers and sellers out there. An active secondary market increases the odds of getting option orders filled at good prices. All other things being equal, the bigger the open interest, the easier it will be to trade that option at a reasonable spread between the bid and ask.

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For example, suppose you look at options on Apple Inc. This suggests that the market in Apple options is active and there may be a lot of investors in the marketplace who want to trade. Therefore, it is likely you can buy one call option contract at the mid-market price. On the other hand, suppose the open interest is 1. This indicates there is very little open interest in those call options and there is no secondary market because there are very few interested buyers and sellers. It would be difficult to enter and exit those options at good prices.

Trading does not occur in a vacuum. Indicators that show you what other market participants are doing can inform your trading system. Daily trading volume and open interest can be used to identify trading opportunities you might otherwise overlook. These indicators are also useful for making sure the options you trade are liquid, allowing you to easily enter and exit a trade at the best possible price. Your Privacy Rights.

Open Interest in Trading: What Is It?

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Unlike options trading volume, open interest is not updated during the trading day. Compare Accounts.

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The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Partner Links. The volume of trade is the total quantity of shares or contracts traded for a specified security during a set period of time. How Open Interest is Determined Open interest is the total number of outstanding derivative contracts, such as options or futures, that have not been settled. The term open interest refers to the total number of outstanding contracts for a given series that are to be delivered on a given day.

(Or Where Do Options Go When They Die?)

Option contracts require the participation of two parties: a buyer and seller. The seller is the party that creates the contract, while a buyer must be willing to purchase it. Taken together, the buyer and seller account for one contract. When discussing open interest, the term is referring to the total of all contracts of a given type that are expiring on a given day. Investors in options will follow the variations in open interest, since it may indicate a change in the market's sentiment towards the underlying security or asset.

Variation in open interest can also indicate a change in the overall investor sentiment towards a market. For example, an increase in the open interest in equity options is considered a bullish signal, while a decrease in open interest is considered a bearish signal.