In last week’s article called Market Makers and the Option Chain, which you can review here, I talked about option volume, and began discussing open interest. Volume is the number of contracts traded during a certain period of time. In any option chain, we can see the figures for the current day’s volume. Next to the Volume column, is another column called Open Interest. Today’s article describes what Open Interest is, and how it changes. Along the way are some important points about how the options market works.
Continuing our example from last time, we looked at selling a single call option contract, on Apple Inc. stock, at a strike price of $640 per share, with an expiration of January, 2015. Our transaction to sell that call is the only transaction on those Jan ’15 640 calls for the day. Prior to our transaction, there was an Open Interest figure for that particular contract of 202.
My lonely single-contract transaction would result in a volume for the day of 1. My parting question was this: How will the Open Interest change? The answer is that it depends. The Open Interest might stay the same (202); or it might increase by one contract, to 203. Which of those happens depends on the previous situation of the person to whom I sold it. That is today’s subject.
To understand how Open Interest changes, bear in mind that for every option contract seller, there must be a buyer in order for the transaction to take place. In our example, I would have been able to get my order to sell a contract filled immediately, even if no other retail traders were participating. That’s because option market makers are always standing by, ready to fill incoming orders at their posted prices. That is their business. They literally make the market – if I want to sell something and they are posting a quote to buy it, then I have someone to sell it to. They are my buyer, even if no one else is ready to buy at that… Continue Reading
