Options Open Interest (OI) refers to the total number of options contracts, both calls and puts, that have not yet been closed, exercised, or expired. When a new options contract is purchased, it increases the open interest. Conversely, when an existing contract is sold or exercised, it decreases the open interest. OI can provide a snapshot of market sentiment and trader interest.

Generally, OI is reported as the combined total of both call and put OI. Unlike trading volume which fluctuates throughout the trading day, OI is typically only reported after the market closes. This daily update clearly shows the ongoing market sentiment and activity.

Example of Open Interest

If the open interest of the ABC call option is initially zero and a trader buys 10 ABC options contracts, the OI for this call option increases to 10.

If on the following day, five ABC contracts are closed and 10 new contracts are opened, the OI increases by five, making the total 15.

Importance of Open Interest

Open interest can be a useful metric for gauging market activity and overall sentiment amongst traders. Rising OI may indicate that new money is coming into the market, while falling OI may indicate that traders may be exiting the market. 

Bullish Sentiment: If OI is increasing and the majority of new positions are calls, it suggests that traders are bullish on the underlying asset.

Bearish Sentiment: If OI is decreasing and this decrease is due to closing call positions, it indicates a bearish sentiment, with traders expecting the underlying asset's price to drop.

Limitations of Open Interest

Despite its usefulness as an indicator of market activity, OI has two important limitations:

Delayed Positioning Data: The specific positioning of market participants (dealer vs. aggressor) is not available until two weeks later.

Daily Update Cycle: Unlike trading volume, which updates in real-time throughout the trading day, OI is only updated once daily after the market closes. This can delay traders' ability to make timely decisions based on the most current data.

How SpotGamma Displays Open Interest

At SpotGamma, we offer daily reports breaking down Put OI and Call OI separately. This additional detail helps traders understand which side of the market - calls or puts - is seeing more activity and can indicate market sentiment.