Open interest shows the current total number of option contracts that exist in the options market. This describes the option contracts that are being traded and haven’t been closed by an offset trade, option exercise, or assignment.
When an option trader buys or sells an option contract, the trade is entered on the market as an opening or a closing option transaction. If you buy new call options that must be written then you are buying the calls to open. That purchase would add to the open interest after they are written. After the position is sold those options would close if they are bought back which would cause open interest to fall.
When an option is sold to open it can also add more contracts to open interest. If you held a position of 100 shares of a stock and wanted to write a covered call option on it, you enter a sale to open. With it being a write to open transaction, it would create new open interest. If you later bought the call options back you would enter a trade to buy to close the call and open interest would drop by one contract. If the call option went in the money and you allowed the call to be exercised and the underlying stock to be called away then open interest would decrease by one contract.
When you write to open a new option you create a new contract.
When you buy to close you remove an existing option from the market.
All option transactions do not create open interest. If you are buying calls or puts and your order is matched with someone already selling existing contracts of the same strike price and expiration date then the total open interest for the contracts will not change
On option expiration of a contract the existing options are either exercised if they are in the money by calling stock, having stock put on someone, or expiring worthless if they are out of the money.
Open interest are the current amount contracts that exist in the market that still have two party risk between the buyer and the seller as it has not been closed or expired yet. Every option contract is two sided with someone long and someone else short every contract. They are a zero sum market.
Option contracts are fungible so they are traded as available and interchangeable. The same person doesn’t have to buy back the same contract they opened.
While more options expire worthless than in the money that is not necessarily an edge to sell them versus buy them as they are traded back and forth and not all are held to expiration. Option buyers can exit for a profit before expiration.
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