Open interest must not be confused with the term “Interest” that is paid on the debt, securities and other kinds of loans and mortgages. Open Interest can be defined as any situation that has a large number of options that can result into a large number of contracts and that options are not closed and are open for any interested entity. Open interest options and contracts are open for a particular day and are not considered to be closed or delivered yet. Another definition of the open interest can be a number of buy market orders for a stock exchange even if a stock exchange is not yet opened.
There are a number of misconceptions related to the idea of the open interest. A common misconception is that open interest is similar to the number of options or volume of options for future trade and future activities. This is not a true concept as it can be explained under in the given table:-
||A buys 1 option and B sells 1 option
||C buys 5 options and D sells 5 options
||A sells 1 option and D buys 1 option
||E buys 5 options from C and C sells 5
On March 1 A buys 1 trading option and leaves an open option and a trading interest of one opportunity. On March 2 C and D trades for 5 new options that make open trading opportunities on March in total 6. On March 3 A takes an offset position by selling its 1 option that reduced the trading opportunities to 5. On March 4 the trading opportunities were sold by C that was purchased by E thus no effect on trading volumes that remain constant at 5.
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