Open interest is one of the most important metrics in options trading, yet many beginners overlook it. Unlike volume, which shows daily activity, open interest reveals the total number of contracts currently held by market participants. Understanding open interest helps you gauge market sentiment and find liquid trading opportunities.
What is Open Interest?
Open interest is the total number of outstanding options contracts that have not been closed, exercised, or expired. It represents the number of contracts currently "open" in the market.
The simple version: Open interest tells you how many contracts exist right now. When someone opens a new position and finds a counterparty, open interest increases. When they close it, open interest decreases.
How Open Interest Changes
Open interest only changes when new contracts are created or existing contracts are closed. Here is how it works:
Open Interest Increases When:
- A new buyer opens a position AND a new seller opens a position
- Both sides are establishing new positions
Open Interest Decreases When:
- A buyer closes a position AND a seller closes a position
- Both sides are closing existing positions
Open Interest Stays the Same When:
- An existing holder sells to a new buyer (position transfer)
- One side is opening while the other is closing
Open Interest Changes Example
Starting open interest: 1,000 contracts
- Trade 1: New buyer + New seller = OI increases to 1,001
- Trade 2: Existing holder sells to new buyer = OI stays at 1,001
- Trade 3: Both sides close positions = OI decreases to 1,000
Open Interest vs Volume
These two metrics are often confused but tell different stories:
| Open Interest | Volume |
|---|---|
| Total outstanding contracts | Contracts traded today |
| Updated once daily (end of day) | Updates in real-time |
| Shows market commitment | Shows daily activity |
| Cumulative measure | Resets to zero each day |
Comparing OI and Volume
AAPL $180 call shows: Open Interest = 50,000 | Volume = 8,000
- 50,000 contracts are currently open from previous days
- 8,000 contracts have traded so far today
- The 8,000 volume might increase OI, decrease it, or leave it unchanged depending on who is trading
Why Open Interest Matters
1. Liquidity Indicator
High open interest generally means better liquidity. More open contracts typically lead to tighter bid-ask spreads and easier order fills. Traders prefer options with high open interest.
2. Market Sentiment
Changes in open interest reveal whether money is flowing into or out of an option. Increasing open interest suggests new positions being established. Decreasing open interest suggests positions being closed.
3. Support and Resistance Levels
High open interest at specific strike prices can act as magnets for the stock price. Market makers hedging these positions can influence how the stock trades near those strikes.
Interpreting Open Interest Changes
Rising Price + Rising OI = Bullish
New money is entering the market and pushing prices up. This suggests a strong uptrend with conviction.
Rising Price + Falling OI = Weak Rally
Price is rising but positions are being closed. Short covering may be driving the move, which could be less sustainable.
Falling Price + Rising OI = Bearish
New money is entering the market on the downside. This suggests conviction in the downtrend.
Falling Price + Falling OI = Weak Decline
Price is falling but positions are being closed. Long liquidation may be driving the move.
Open Interest at Expiration
Open interest becomes especially important as expiration approaches. Options with high open interest at certain strikes can influence stock prices through a phenomenon called "gamma pinning."
Max Pain Theory
The "max pain" price is the strike where the most options would expire worthless, causing maximum loss for option holders. High open interest strikes often correlate with where the stock pins at expiration.
- Strike $100 has 10,000 call OI and 8,000 put OI
- Market makers are hedging these positions
- As expiration nears, the stock may gravitate toward $100
Using Open Interest in Trading
Finding Liquid Options
Before trading any option, check its open interest. Aim for:
- Minimum: 500+ open interest for decent liquidity
- Better: 2,000+ for good liquidity
- Best: 10,000+ for excellent liquidity
Identifying Key Levels
Look for strikes with unusually high open interest. These levels often represent:
- Major support or resistance levels
- Popular hedging strikes
- Institutional positioning
Analyzing Trends
Track how open interest changes over time:
- Steadily increasing OI = growing interest in that strike
- Suddenly spiking OI = large player establishing position
- Declining OI = positions being closed or rolled
Open Interest for Different Expirations
Open interest varies significantly across expirations:
- Weekly options: Often lower OI, more speculative
- Monthly options: Typically highest OI, most liquid
- LEAPS: Lower OI but held longer, less turnover
Monthly expiration options (third Friday) usually have the most open interest and best liquidity.
Put/Call Open Interest Ratio
Comparing put and call open interest provides sentiment insights:
- High call OI vs put OI: Bullish sentiment or upside hedging
- High put OI vs call OI: Bearish sentiment or portfolio hedging
- Extreme ratios: Potential contrarian signals
Common Mistakes with Open Interest
- Confusing with volume: OI shows total positions, not daily activity
- Ignoring the data: Always check OI before trading for liquidity
- Overinterpreting changes: Small OI changes may not be significant
- Missing the timing: OI updates after market close, not in real-time
Track Open Interest Easily
Pro Trader Dashboard shows open interest alongside volume for all your positions. Spot high-liquidity opportunities and track market sentiment instantly.
Summary
Open interest represents the total number of outstanding options contracts. Unlike volume, which resets daily, open interest accumulates over time. It helps you gauge liquidity, market sentiment, and potential price magnets. Always check open interest before trading to ensure adequate liquidity and understand market positioning.
Ready to learn more? Check out our guide on options volume or learn about bid-ask spreads.