Open Interest (Options) Explained - Derivatives

There is a secondary market for options because there is an open interest in options and there are open interests in all options. Open interest also provides important information about the liquidity of options; a buyer of a futures contract must have a seller, but for an option it must also be open to all buyers. If an option has a great open interest, it has the largest number of buyers and sellers, and an active secondary market increases the chances of receiving an option order at a good price. An upward trend should be confirmed by an increase in open interest and a decrease in the price of an option, as well as by an increase in interest in a secondary market. Similarly, a decline in open interest (or price decline) in an options market confirms a downward trend, and similarly, the rise in open interest and price decline confirm a downward trend. A price that falls while open interest rates remain the same or fall might indicate a possible turnaround, but a fall in prices, even if open interest rates remain the same or fall, could reverse it.

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