what does open interest mean in options
Open interest in options means the number of at the money contracts that have not yet been settled (meaning that these positions are still open). Settlement could be either through physical delivery of the underlying or through payment of cash.
Open interest positions are important because if the option seller is to settle in cash, they would need to buy/sell the underlying which has the potential to affect market sentiment.
Open Interest Definition:
How I understand open interest is that it is the total number of option contracts that have been traded but still awaiting settlement. If settlement requires physical delivery, it is going to take some time to arrange the logistics required for delivery to the location specified in the contract. The open interest figure is updated once daily.
Open Interest vs Volume:
Lots of people confuse open interest with volume but they are different. While open interest measures total number of in the money options awaiting delivery, volume measures the number of option contracts traded in one day.
Open interest as per futures and option contracts is the total number of individual contracts that have been opened. The open interest number fluctuates upward or downwards; if any contract is closed it is subtracted from the open interest figure and if any new contracts are opened it is added to the open interest figure.
The volume of an option or futures contract refers to the total number of transactions recorded in a day. The volume figure only increases (it doesn't decrease) as more transactions (buy or sell) take place.
When I am looking at open interest data, I only do so for option contracts that are at the money because they will tend to see more trading.
