OPEN INTEREST

Open interest refers to the number of unsettled asset contracts that exist for a given market. For example, open interest for a standard option contract is the number of contracts that have been sold; if 40 Calls for Microsoft stock have been sold for the 30 USD strike price, then traders would say that those Calls have an open interest of 40. The open interest in Puts is equal to however many of Puts that have been sold.

Traders use open interest to try to gauge investor sentiment by looking at what is called the Put/Call ratio. If the open interest in Puts is greater than the open interest in Calls for a particular company’s stock, then the Put/Call ratio will be greater than 1, which signals that most traders and investors think the stock price will fall. If the open interest in Calls is greater, the Put/Call ratio will be less than 1, which is a bullish sign for the stock price. Market contrarians use Put/Call ratios in the opposite way, because they assume that the majority of people are usually wrong about the markets. Since binary option traders generally engage in short-term trading, the Put/Call ratio is of limited use but can still be interesting to look at for a short-term play just before a company’s earnings announcement.

Many traders examine open interest to try to identify insider information. If a Put or Call option with a seemingly random time of expiration and strike price has an unusually high open interest, and all of the other options for the same stock have relatively low open interests, there might be something going on; most traders would say that someone with insider information is stock-piling the contract with the high open interest and that following suit would be a good and profitable idea.