When you look at an options chain, you will see a column labeled "Open Interest" or "OI." This number tells you something important about that option contract, but many beginners skip right past it. Understanding open interest can help you make smarter trading decisions and avoid illiquid options that are hard to trade.
What is Open Interest?
Open interest is the total number of outstanding option contracts that have not been closed, exercised, or expired. Each contract represents an agreement between a buyer and a seller, so every open contract has both someone who is long and someone who is short.
Simple definition: Open interest counts how many contracts are currently "open" in the market. It tells you how many people are still holding positions in that specific option.
How Open Interest Changes
Open interest changes based on whether new contracts are created or existing contracts are closed:
- OI increases: When a new buyer and new seller open a trade together, open interest goes up by 1
- OI decreases: When someone who is long closes their position with someone who is short, open interest goes down by 1
- OI stays the same: When a current holder sells to a new buyer, open interest does not change (one position closed, one opened)
Example: How Open Interest Works
The AAPL $200 call has 10,000 open interest at the start of the day:
- Trader A (new) buys 5 contracts from Trader B (new seller): OI becomes 10,005
- Trader C (already long) sells 10 contracts to Trader D (already short closing): OI becomes 9,995
- Trader E (already long) sells 3 contracts to Trader F (new buyer): OI stays at 9,995
At end of day, open interest is 9,995 contracts.
Open Interest vs Volume
Many traders confuse open interest with volume, but they measure different things:
- Volume: How many contracts traded today. Resets to zero every day.
- Open Interest: How many contracts are currently outstanding. Carries over day to day.
Think of it this way: Volume shows activity today. Open interest shows total positions built up over time.
Why Open Interest Matters
1. Liquidity Indicator
High open interest usually means better liquidity. When many contracts are outstanding, there are more potential buyers and sellers, which typically leads to tighter bid-ask spreads and easier execution.
2. Market Sentiment Signal
Changes in open interest can reveal market sentiment:
- Rising price + rising OI: Bullish signal (new money entering long positions)
- Rising price + falling OI: Short covering rally (less bullish)
- Falling price + rising OI: Bearish signal (new money entering short positions)
- Falling price + falling OI: Long liquidation (selling pressure may be ending)
3. Support and Resistance Levels
Strike prices with high open interest often act as support or resistance levels. Market makers who sold options at these strikes may hedge their positions, creating buying or selling pressure at those prices.
Practical tip: Look for strikes with unusually high open interest. These "pinning" levels can influence where a stock closes on expiration day.
How to Use Open Interest in Trading
Finding Liquid Options
Before trading any option, check its open interest. As a general rule:
- Under 100 OI: Very illiquid, wide spreads, hard to exit
- 100-500 OI: Low liquidity, use limit orders
- 500-5,000 OI: Decent liquidity for most traders
- Over 5,000 OI: High liquidity, tight spreads
Confirming Trends
Use open interest with price action to confirm trends. If a stock is making new highs and open interest is also rising, it suggests the trend has conviction behind it.
Spotting Unusual Activity
Large increases in open interest at specific strikes can signal institutional activity. If you see 50,000 new contracts appear at a strike overnight, someone big is making a bet.
Example: Using OI for Trade Decisions
You want to buy SPY calls. Looking at the options chain:
- $480 call: Open Interest 125,000 - Bid $2.45, Ask $2.47 (tight spread)
- $482 call: Open Interest 800 - Bid $1.85, Ask $2.10 (wide spread)
The $480 call has better liquidity. You will get better fills and can exit more easily.
Common Mistakes with Open Interest
- Ignoring OI entirely: Trading low OI options means fighting wide spreads
- Confusing OI with volume: A high volume day does not mean the option is liquid if OI is low
- Not checking OI before earnings: After big moves, liquidity can dry up fast
- Using OI alone: Always combine with price action and other indicators
Where to Find Open Interest Data
Open interest is updated once per day, after the market closes. You can find it on:
- Your broker's options chain
- Financial websites like Yahoo Finance
- Options data providers like CBOE
Track Your Options Trades
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Summary
Open interest tells you how many option contracts are currently outstanding. High open interest means better liquidity and tighter spreads. Changes in open interest, combined with price movement, can reveal market sentiment and help confirm trends. Always check open interest before trading an option to ensure you can get in and out at fair prices.
Want to learn more? Read our guide on options volume or understand implied volatility.