What is the significance of open interest in options trading strategies?
Open interest holds significant importance in options trading strategies as it provides crucial information about the activity and popularity of a specific options contract. By understanding the significance of open interest, options traders can make more informed decisions.
"Open interest"represents the total number of outstanding options contracts that have not been closed or exercised. It reflects the number of contracts held by market participants at any given time. Higher open interest indicates increased market participation and a larger number of active contracts. One key benefit of open interest is that it offers insights into market liquidity. When open interest is high, it suggests a more liquid market with ample buyers and sellers. This liquidity translates into tighter bid-ask spreads, allowing traders to enter and exit positions with ease and at favorable prices.
Open interest in options is looked at from option sellers’ perspective as they have more stake in the game or skin in the game. So, the study of option sellers’ behaviour, relative to underlying price movement and open interest dynamics of different strikes is of importance to understand.
Where is the highest OI call strike placed? Where is the highest OI put strike placed? Now how does the underlying moves during market hours and how these soft spots behave?
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