In Options Trading, What Is Open Interest?

Open interest in options trading measures how many option contracts have been taken out for a given asset. It’s an important measure that helps you spot trading opportunities.

You can think of open interest as a cousin to short interest and volume. It’s a sign that a stock or other asset could have much more volume coming to it.

Open interest is also an important measure of an option’s liquidity.

How does open interest accrue? How much is a good open interest? Read on to learn more!

New to options trading? Check this guide to the basics of options trading. 

What Is Open Interest?

Open interest measures the number of outstanding derivatives contracts for a given asset. Outstanding contracts mean they haven’t been settled. Open interest is used for both options and futures contracts.

Open interest counts the total number options contracts currently outstanding on an asset. These are options that haven’t been exercised… but they could still be!

Numbers are also kept on call open interest and put open interest.

Open interest goes down when option holders and writers close their active positions. Open interest goes up when market participants open new active positions.

Here’s an illustration of how open interest works:

Let’s say the total open interest in Company XYZ is 10,000. Then buyers purchase 5,000 call contracts, bringing the total open interest to 15,000. Then 2,000 of these contracts are exercised, bringing the total open interest down to 13,000.

Learning trading terminology is important. Read my posts about buy to open and spread option trading to learn more about important options trading terms.

Why Does It Matter?

Open interest matters because it’s a sign of an option’s liquidity.

A high open interest means there are many traders holding options contracts in a given asset. This means that there’s liquidity in the options market — options on the asset are being opened and closed at high frequency. That helps if you want to trade, write, or buy an options contract.

A high open interest is also a sign of potential stock trading volume. A high call open interest combined with bullish movement in a chart can tip savvy stock traders off to a future volume surge.

What Is the Difference Between Volume and Open Interest in Options Trading?

The main difference between volume and open interest in options trading is how they’re measured. Volume and open interest both measure liquidity and trading activity. But they do it in different ways.

Open interest measures them by counting how many options contracts are active. Volume measures them by counting the number of trades for that stock option in a certain period.

Another notable difference is the update frequency. Exchanges calculate options trading volume as it happens. Open interest is usually updated once per day..

Is using stop-loss orders a good idea? Read my post on stop-loss orders to find the answer.

What Is a Good Open Interest for Options?

Just like volume, traders shouldn’t be looking at a specific open interest number as “good.” Instead we look at unusual open interest as a sign of market sentiment.

A blue-chip stock like Apple Inc. (NASDAQ: AAPL) measures its average open interest in the millions. A lower-priced stock like C3.ai Inc. (NYSE: AI) has a much lower open interest of 480,000 at the time of writing…

But AI’s current open interest is 200% above its 52-week average! Meanwhile, Apple’s open interest of 6.7 million is lower than its average.

Key Takeaways

Open interest is an important measure in options trading. It shows you how many options contracts are currently active, which allows you to measure the option’s liquidity.

Open interest increases over time as traders open positions. It also declines over time as traders close positions. Options with higher open interest are more liquid. This means entering and exiting trades is easier.

The reverse is also true — options with lower open interest are usually less liquid. This makes entering and exiting harder.

You can use open interest to spot current market trends and trading opportunities. But it’s only part of the puzzle. You’ll need to put the entire puzzle together to become a self-sufficient trader.

If you want to fast-track your journey, you’ll need to find a good guide. In the options world, I think there’s no better mentor than my former student Mark Croock.

Mark has racked up $4 million in career earnings, mostly from trading options. He’s done this by adapting my penny stock trading strategies to options. Before he was a teacher, he was one of my best students — watching every single webinar in the Trading Challenge 2 or 3 times!

Now he’s got his own mentorship program, called the Evolved Trader. Check it out for strategy sessions, trade alerts, a great chat room, and more!

Are you interested in learning options trading? Start by reading my guide to learning how to trade options.