Options bought or sold?

[Maverickz]

Quote from J-Blaze:

I am pretty sure that the first part and the third part is incorrect.. the 2nd part is correct.. here is the breakdown

#1 -INCORRECT "if you buy a contract from someone that is selling one to enter a position AND you are buying to enter a position then yes it goes up by one"

-if someone sells to open.. that equals +1 to open interest

-if you buy to enter a postion.. that equals +1 to open interest

-the total is +2 to open interest.


#2 - CORRECT "If you buy from someone that had already bought and is closing a position and you are opening a position then it stays the same"

-if that 'someone' closes their position.. then that is a -1 to open interest

-if you buy to open a contract. that is +1 to open interest.

-this scenario would make no change to open interest. you are correct with this one


#3 - If you are buying to close from someone selling to close then it goes down by one. You never know when you buy which will happen.

- if you are buying to close.. open interest will be -1 as a result

-if someone is selling to close.. then open interest will be -1 as a result

-open interest will be -2 as a result of your third scenario.. not flat (0)

again.. like I noted in my first response (I had little time to spell this out.. now I do).. the options exchange will act as a market maker when buyers and sellers do not line up equally. this provides liquidity in the market and assures people that they will always be able to open or close their contracts.

this is the way it works. not like you described.

If you think I'm incorrect about any of this.. please correct me.. I'm learning like most of us. I"m pretty sure I'm right. I got that information from multiple sources and from people who do this successfully for a living.

Open Interest is a count of Open Contracts not open positions. Which is why what I said and MTE said is correct. A contract for anything covers 1 buyer and 1 seller. If you write a contract to buy a house, you don't need a second contract for the seller to sell it. The one contract includes the buyer's commitment and the seller's commitment.

If you buy to open from someone selling to open (going short) then OI increases by 1 because only 1 new contract is created.

When you buy to open from someone that is selling to close. Then OI doesn't change since a contract was neither created nor completed it just changed hands.

When you buy to close from someone selling to close the contract is considered complete and reduces OI by 1.

Lets take a Call Option contract for example. If I decide to write a call option (sell one to open) and you decide to buy it you now hold the contract I wrote. You do not need to create a whole new contract. I now have the obligation to sell my underlying equity at the strike price of the option and you have the option to buy my underlying equity at the designated stock. Since only 1 new contract was created OI is increased by 1.

Now you decide to sell the same option (closing your position) to someone else that wants to open a position. The contract that I wrote will simply change hands to the new buyer and no new contract is needed so OI stays the same.

Now that guy decides to sell the option to close his position and I decide I want to close my position and buy back my contract. Since there is no longer a buyer or seller for this option the contract is closed and OI drops by 1.

I hope that makes more sense to you. OI is a count of contracts not positions.

 

[Maverickz]

Quote from J-Blaze:

this is in-correct. there is not always a buyer and a seller of options. when there are (for instance) more buyers than sellers on a particular option then the options exchange is obligated to act as a market maker and they will buy the option (if we're selling) or they will sell the option (if we are buying).

There is always a buyer and a seller. Even if the buyer or seller is a market maker. How can you possibly buy something if there no one will sell it?

EDIT to clarify: IF an item changes hands, there is always a buyer and a seller. In your example the market maker will become either the buyer or seller but there still have to be BOTH a buyer and a seller for the trade to happen.

 

[J-Blaze]

Quote from Maverickz:



I hope that makes more sense to you. OI is a count of contracts not positions. [/B]

It totally makes more sense. I should of realized all of that and taken more time in processing it all. It's rather obvious.. but I was wrong.

Thanks for taking the time to write all that out

 

[Secatu]

Nothing new to share. I've just been lurking around ET for a couple months, and just want to thank y'all for the discussions that I've learned a lot from.

Yeah, there are some pissing contests typical of all forums, but I always get something I can dig into more. This thread is one of those.

I do have a favor to ask: Who are the posters that y'all respect that I can learn a lot from? I only get to check the forum periodically during work and home. I trade stocks and an options, but neither very well, so that's why I'm here. I'd really prefer specific posters to subjects - not to stalk , but because most forums have a few posters that bring the most wisdom (the ol' 80/20 rule).

Thanks, Jeff

 

[J-Blaze]

Quote from Secatu:


I do have a favor to ask: Who are the posters that y'all respect that I can learn a lot from? I only get to check the forum periodically during work and home. I trade stocks and an options, but neither very well, so that's why I'm here. I'd really prefer specific posters to subjects - not to stalk

Thanks, Jeff

I understand that you want people on here.. but I would recommend watching Fast Money (both 1/2 time report and the 'standard' version at 5pm) and Strategy Session. I would try to understand the why's of their actions... and then watch the items play out in 'real life'. I find it very valuable to understand professional's reasons for doing what they do. I would not blindly follow them or anyone.. but to understand philosophies are paramount.

Also.. check out optionmonster.com.. they have free webinars and stuff.. a lot of things are archived too. Daily postings and shit as well. Jon Najarian and his brother pete (both on fast money usually) run that site. They are easily in the top few of my respected and 'listened to' (albeit not blindly followed) pro's..

I understand you did not want this.. but wanted actual names on this site. I just joined so I don't have what you asked for.. I'm hoping what I gave you can and will help.

Also.. paper trade with options for a year at least. That's what I would recommend. Shares are a little different.. especially if you are buying for long term thesis'. you don't lose a share.. unless the company goes bankrupt and what not. Although you can blow your shit out with options. I did that at first.. bad. Because I played with real money from the start.. which is dumb as hell.

J

 

[chartman]

Quote from J-Blaze:

there is not always a buyer and a seller of options. when there are (for instance) more buyers than sellers on a particular option then the options exchange is obligated to act as a market maker and they will buy the option (if we're selling) or they will sell the option (if we are buying).

Exchanges are only a marketplace where buyers and sellers transact trades. They are not a market maker. There are firms/individuals that are designated as market makers by exchanges with an obligation to make an orderly market but the exchanges do not take a position on a trade.

 

[J-Blaze]

Quote from chartman:

Exchanges are only a marketplace where buyers and sellers transact trades. They are not a market maker. There are firms/individuals that are designated as market makers by exchanges with an obligation to make an orderly market but the exchanges do not take a position on a trade.

You guys are all very helpful. Thank you. It looks like I need to re-read the things I have read.

I thought I was right