Understanding and Utilizing Open Interest in Options Trading

Randall Liss talks about open interest; what it is, what does it tells you, and how do you use it.
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In today’s Traders Exclusive, Randall Liss discusses open interest and how traders utilize it in their analysis. In short, open interest describes the number of contracts outstanding. Therefore, on the first day of trading, open interest starts at zero. When two parties execute options contracts, the open interest rises by the amount of contracts that remain open. When contracts are closed or exercised, the open interest is reduced by that amount. The first rule of using open interest is to only trade contracts that have a large open interest. That means there is a lot of involvement and you will be able to get in and out of your position easily. Another rule is that very often, expiration will end up on the strike with the largest open interest. The last thing to look out for is a large imbalance between puts and calls in the open interest, which can act as a contrarian indicator. Large open interest with a good balance between puts and calls can give you an idea where expiration will be.