Stock options open interest definition dubai
So, when an option is traded with one party opening and one party closing, the open interest remains unchanged. If both parties in the transaction are closing positions then the open interest decreases accordingly.
If both parties are opening positions then the open interest goes up accordingly. One way to use open interest is to look at it relative to the volume of contracts traded. When the volume exceeds the existing open interest on a given day, this suggests that trading in that option was exceptionally high that day. Open interest can help you determine whether there is unusually high or low volume for any particular option.
Open interest also gives you key information regarding the liquidity of an option. If there is no open interest for an option, there is no secondary market for that option. When options have large open interest, it means they have a large number of buyers and sellers, and an active secondary market will increase the odds of getting option orders filled at good prices. So, all other things being equal, the bigger the open interest, the easier it will be to trade that option at a reasonable spread between the bid and ask.
Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend up, down or sideways will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves. A leveling off of open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market.
An increase in open interest along with an increase in price is said [ citation needed ] to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend.
An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal. The relationship between the prevailing price trend and open interest can be summarized by the following table: From Wikipedia, the free encyclopedia.
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Views Read Edit View history. This page was last edited on 25 November , at High open interest for a given option contract means a lot of people are interested in that option.
The main benefit of trading options with high open interest is that it tends to reflect greater liquidity for that contract. So there will be less of a price discrepancy between what someone wants to pay for an option and how much someone wants to sell it for.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.
Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.
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