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The following is the Option Chain for the symbol UBER.
There is a high Interest for 40 CALL. There is less interest for 40 PUT.
My questions are:
Open Interest (not Option Interest) represents the number of contracts that exist on any given day.
In order for a trade to occur, there must be a buyer and a seller. Each party may be opening or closing the contract. There are 4 scenarios:
Buy to Open (BTO) and Sell To Open (STO)
BTO and Sell To Close (STC)
Buy To Close (BTC) and STO
BTC and STC
A call buyer is bullish. If that call purchase is to hedge a short position in the underlying, the trader is actually bearish. Therefore, there's no way to infer what an investor's directional bias is from call (or put) purchases and possible changes in open interest. To that end, some delve into combining price, volume and open interest to determine direction. I've never been able to discern it but here's an article from Investopedia that explains it.
In general, option pricing follows stock price. Stock price can follow option price but those are nuanced exceptions and tend to have little to no effect on share price unless it's a very illiquid stock.
For example, if option pricing strays from put/call parity, a market maker or floor trader will execute a conversion or a reversal which leads to buying or selling of shares to drive option prices back in line.
Another example might be if a option owner exercises a large amount of options and the counter party(ies) have naked options and must cover the assignment. These are infrequent exceptions and they occur randomly.
Open interest information tells us how many contracts are open and live in the market. Volume on the other hand tells us how many trades were executed on the given day. For every 1 buy and 1 sell, volume adds up to 1. The volume counter starts from zero at the start of the day and increments as and when new trades occur. Hence the volume data always increases on an intra-day basis. However, OI is not discrete like volumes, OI stacks up or reduces based on the entry and exit of traders.
The following tables summarizes the trader’s perspective with respect to changes in volume and prices –
Price Volume Trader’s Perception
Increase Increase Bullish
Decrease Decrease Bearish trend could probably end, expect reversal
Decrease Increase Bearish
Increase Decrease Bullish trend could probably end, expect reversal
The following tables summarizes the trader’s perspective with respect to changes in the OI and prices –
Price OI Trader’s Perception
Increase Increase More trades on the long side
Decrease Decrease Longs are covering their position, also called long unwinding
Decrease Increase More trades on the short side
Increase Decrease Shorts are covering their position, also called short covering
Key
Open Interest (OI) is a number that tells you how many contracts are currently outstanding (open) in the market
OI increases when new contracts are added. OI decreases when contracts are squared off
OI does not change when there is transfer of contracts from one party to another
Unlike volumes, OI is continuous data
On a stand along basis OI and Volume information does not convey information, hence it makes sense to always pair it with the price to understand the impact of their respective variation
Abnormally high OI indicates high leverage, beware of such situations.
