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I wasn't able to find a good example of how open interest works.

Suppose at the beginning of trading period there is no open interest, these are the only trades made during these days, and all trades are made in the same option.

01feb  open position to  buy 500 calls    vol =  500    OI =  500
02feb  open position to sell 500 calls    vol =  500    OI = 1000

03feb close position to  buy 100 calls    vol =  100    OI =  900
04feb close position to sell 100 calls    vol =  100    OI =  800

05feb no trades made                      vol =    0    OI =  800

06feb close position to  buy 400 calls    vol =  400    OI =  400
06feb close position to sell 300 calls    vol =  700    OI =  100

07feb  open position to sell 500 calls    vol =  500    OI =  600
07feb close position to sell 600 calls    vol = 1100    OI =    0

Am I right with how open interest behaves?

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Your analysis is incorrect.

If both sides of the transaction are opening positions, open interest increases by +1 (new contracts are being created)

If both sides of the transaction are closing positions, open interest decreases by -1 (existing contracts are disappearing)

If one side of the transaction is opening and the other side is closing then open interest is unchanged (contracts are just changing hands).

  • You say: If both sides of the transaction are opening positions, open interest increases by +1. By +1 or by +2? Two sides opened x1 positions, so should be +2 increase. – Roman K. Nov 16 '18 at 8:04
  • @Roman K. - It's day one of a new option series and no contracts exist. I decide to sell one XYZ Mar 50 put to open (STO). You want to buy that contract to open (BTO). We agree on price and the transaction occurs, creating ONE contract. There are two counter parties but only one contract has been created so Open Interest increases by +1. BTO + STO = +1, BTO + STC = 0, STO + BTC = 0, and BTC + STC = -1. – Bob Baerker Nov 16 '18 at 12:59
  • "decreases by -1"... so increases by 1? – horse hair Dec 15 '18 at 17:15
  • Let's not split horse hairs. Decrease means less. IOW, the original number plus a -1 OR +1 subtracted from the original number. Either way, the answer is 9. – Bob Baerker Dec 16 '18 at 19:24

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