Open Interest - does it have meaning?

R

RainmanRam

How is open interest used?

I understand the definition and that you can't tell if the intrest is short or long which doesn't seem to tell you much.

It can also be compared to volume as an indication of short-term vs long(er)-term trading.

What else does it tell you? How is it used in analysis and decision making? Is there anywhere (preferably free) that I can get historical data for volume and interest on individual contracts?

I've been referring to it just before throwing the chicken bones but it doesn't seem to have a noticeable effect.

Thanks,
Ray
 
Quote from RainmanRam:

How is open interest used?

I understand the definition and that you can't tell if the intrest is short or long which doesn't seem to tell you much.

It can also be compared to volume as an indication of short-term vs long(er)-term trading.

What else does it tell you? How is it used in analysis and decision making? Is there anywhere (preferably free) that I can get historical data for volume and interest on individual contracts?

I've been referring to it just before throwing the chicken bones but it doesn't seem to have a noticeable effect.

Thanks,
Ray
More...

1) Open interest is neither short nor long. Someone owns the option and someone sold the option.

2) If you mean to say that you cannot tell if the person who originated the trade - i.e., entered a buy order or sell order, that's true.

3) Open interest is used by the wrong people for the wrong reasons.

4) Open interest merely gives you an indication of how often the option trades. Yes, it's related to volume - but it's not the same. Higher OI correlates with higher volume, most of the time.

5) OI tells you nothing that you want to know. Tracking data is useless. Unless you know how the option buyer or seller is hedging the option trade, how can knowing how many options are outstanding going to tell you anything?

6) Forget it.

Mark
 
Dagnyt - Could it not be helpful in identifying what strikes are of particular interest to traders?

I'd imagine this is helpful as expiration approaches and for identifying support/resistence, no?
 
Quote from dagnyt:

1) Open interest is neither short nor long. Someone owns the option and someone sold the option.

2) If you mean to say that you cannot tell if the person who originated the trade - i.e., entered a buy order or sell order, that's true.

3) Open interest is used by the wrong people for the wrong reasons.

4) Open interest merely gives you an indication of how often the option trades. Yes, it's related to volume - but it's not the same. Higher OI correlates with higher volume, most of the time.

5) OI tells you nothing that you want to know. Tracking data is useless. Unless you know how the option buyer or seller is hedging the option trade, how can knowing how many options are outstanding going to tell you anything?

6) Forget it.

Mark
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I'll only take issue with Mark on Item # 5.

Since OI is linked to volume... then it is an indicator of liquidity, which usually has an impact on bid \ ask spreads.

OI is therefore a metric that I use to ultimately determine whether I do a trade or not.

Mech
 
Dagnyt - Could it not be helpful in identifying what strikes are of particular interest to traders? I'd imagine this is helpful as expiration approaches and for identifying support/resistence, no?
More...
That depends on whether you belive the stock moves because they're buying/selling options or whether the options move because they're buying/selling the stock :)
 
As with most things, there are very few absolutes. When someone uses "can't", it usually means that they personally don't because I am sure that someone actually does. Make sense?

OI is important to me for the reason mentioned by MechTrade above, it is an indicator of liquidity and does have an impact on the spread. I do not use it as a predictor of direction but it is important to me that OI be at a certain level before I make some of my trades.

Some of my trades skirt the line where they may be exersized early. Using the time-frame of my trade combined with the OI, I can estimate the chance of my trade being exercised early. Sometimes that is my objective while other times not.

Joe.
 
Quote from Soon2Bgreat:

Dagnyt - Could it not be helpful in identifying what strikes are of particular interest to traders?

I'd imagine this is helpful as expiration approaches and for identifying support/resistence, no?
More...

You already know that strikes that are closest to the money are of most interest to traders.

The truth is you can use any metric to measure something. And if you can find a high correlation that allows you to trade more efficiently, then the metric is of value to you.

As mentioned, a higher OI suggests decent trading volume, which in turns suggests it it's okay to trade the options. But sometimes a high OI is the result of one huge trade and is not indicative of volume.

There's a lot of personal comfort here. It's always better to trade options with lots of volume and public participation. No one wants to trade exclusively with the market makers.

IMHO, OI has nothing to do with support/resistance. As I said, if you find use for the data, then go ahead and use it. But some people claim it can be used to predict market direction, and I don't

Mark
 
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