What is option open interest The Ultimate Guide

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What is option open interest The Ultimate Guide
Many people find it very complex to learn options
trading. Learning to trade options is like an
engine, it has many working parts that combine to
create something wonderful. From Greeks to
spreads and open interest! Option open interest
can be used to describe the outstanding contracts
in any derivative market that have not yet been
settled for that financial asset. Either futures
or options. The following dives into the open
interest of options.
What is option open interest?
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Option open interest vs Volume?

• Option open interest should not be confused for
  volume. Volume is the actual contract completion
  and traded. Instead think of the open interest as
  the activity in the options market. Whether its
  decreasing or increasing the inflow into the
  options market.

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Break down of option open interest
An options contract is two-sided, a buy side and
a sell side. Why is that? Because in order to
have a contract buyer, you need a seller. The two
together create the completion of an option
contract. Think of it this way, if you are a
buyer of an asset, and there are no sellers. You
cannot possible buy anything. Options contracts
are denoted in 100 shares denominations of the
underlying. If you buy one Apple options
contract, you could have access to 100 shares of
Apple if you chose to. When the buyer of the
options contract decides to buy a contract. They
open the position and the contract is now labeled
open. It is open until the buyer decides to
close the position.
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How does open interest change?
When a buyer and seller of an options contract
come together to initiate a position, the open
interest of that underlying asset increases by
one contract. If they both exit the position,
then the open interest decreases by one. The
open interest change is equal to the number of
contracts being open rather than the transaction
of each buyer and seller individually. It takes a
buyer and a seller to create opening interest.
The means the open interest is equal to either
all the buyers or all the sellers. Rather than
the combination of the two. Options contracts can
be either puts or calls to the barebone of the
contracts. You can buy either puts or calls. So,
the open interest can be the total of puts and
calls. Or you can break it down by puts or calls.
In the image below you will see the open interest
of both puts and calls on Tesla. Notice it
doesnt differentiate between sellers and buyers
of contracts. New contracts create open interest
changes.
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Why is open interest important?
Why do investors and traders follow open
interest? It does not define where price will be!
People often hold the misconception that high
open interest at a certain strike price means
that the price of the underlying will get to that
level by a certain expiry. It just means that a
lot of contracts think that price will get there,
not necessarily being correct. Why do we watch
option open interest so carefully? Because it
identifies the market activity. When you see open
interest fall for certain strike prices on the
underlying asset there are very little to no open
positions for that level. Based on that expiry
investors and traders do not expect price to get
to those levels into the expiration.
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Conclusion
The option open interest should be considered
greatly. Especially at strike prices that have
large open interest levels. Traders and investors
should monitor the change in open interest as
well to get the market edge. Open interest should
not be confused with the volume of the underlying.
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