If the original writer of an option contract buys it back, does that mean a reduction in the open interest?

To my understanding, option contracts are written and then sold/traded/bought back. The trading volume and open interest can be tracked.

If a large amount of unexpired out-of-the-money options contracts "disappear" (e.g. from one day to another the number of open interest goes from 2k to 0), what can be the case? Does that mean that someone just exercised their out-of-the-money options contracts or can the original writer buy it back and "de-write" or invalidate the options, resulting in an open interest of zero?

  • why would you buy back an option contract that's out-of-the-money for the holder? – Mr Arkadin Jun 24 at 9:52
  • you would buy back an OTM contract because you no longer wish to be obligated to the terms of the contract. A common example is a covered call writer who would prefer to keep his stock. As the stock approaches the short strike, the contract is bought to close (BTC). It is preferable to do so before the contract becomes ITM. Sometimes this is part of a roll which means BTC the existing contract and sell to open a higher strike and possibly a later expiration. – Bob Baerker Jun 24 at 12:33

Open Interest represents the number of contracts that exist on any given day. Each party to an option trade may be opening or closing the contract. There are 4 scenarios:

Buy to Open (BTO) and Sell To Open (STO)

  • Both parties are initiating a new position (one new buyer and one new seller) so Open Interest increases by one

Buy to Open (BTO) and Sell To Close (STC)

  • If a contract owner sells to a new trader, Open Interest does not change (an existing contract is changing hands)

Buy To Close (BTC) and Sell to Open (STO)

  • If someone short a contract buys from a new writer, Open Interest does not change (an existing contract is changing hands)

Buy To Close (BTC) and Sell to Close (STC)

  • Both parties are closing an existing position (one previous buyer and one previous seller) so Open Interest declines by one

If Open Interest is declining then there are two possible causes:

  1. Both parties are closing their contract (BTC or STC)

  2. Contracts are being exercised. Note that these would be in-the-money contracts (ITM) not out-of-the-money (OTM) because it makes no sense to exercise to buy or sell at a worse price than what is available in the market.

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First there is no transparent way to track if he bought an "original" or "not-original" option contact back.

Second, the option that he bought (back) might or might not be newly written by a new writer.

Thus, the answer is indeterminate.

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