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To: Glenn D. Rudolph who wrote (15324)3/16/1997 12:20:00 PM
From: David Rosenberg   of 18024
 
To Glenn and David U.

Just to add to this somewhat confusing discussion here's my ("algebraic") theory of how to calculate "open contracts"

with each contract there is a "buyer" and a "seller"
call them "B" and S"
each transaction one can either perform it as an "opening" transaction
or as a "closing" transaction. However a closing transaction can only be performed if the individual already has an "open" contract to "close".

To get the newspaper amount of open contracts (i.e. the amount you see in the newspaper or on the exchanges)

take the number of opens in each transaction minus the closes and divide by two:

now there are four possibilties for any transaction:

(i)suppose we have an open by B and an open by S: 1+1=2 (divide by 2)=1
thus the open interest goes up by one i.e net +1

(ii) open by B and close by S: 1 + (-1)=0 /2=0 net no change
(iii) close by B and open by S: (-1)+1=0 /2 =0 net no change

(iv)close by B and close by S (-1) + (-1)= -2 /2 = -1 net goes down by 1

it may be possible artificially to "inflate" the number of open contracts as follows

1. trader X buys a contract to open trader Y sells contract to open now the interest is (1+1=2)/2= 1 open contract

2. then trader X sells contract but also to open and trader Y buys
the contract but also to open (1+1=2)/2 = another "open" contract

the newspaper will report that there are "two" open contracts

However ... in reality the position in each of X and Y's accounts could each be really closed out because each has a single buy and a single sell

Suppose X's brokerage firm decides to take X's position

Long 1 contract (the Buy)
Short 1 contract (the Sell)

and delete it i.e. cancel it then you could think of it as two closing transactions in the same account (-1) + (-1) = -2/2 = -1
this should reduce the "newspaper amount" by one contract

similarly Y's position could be canceled resulting in two more closing transactions and another decrease of one to the "newspaper amount"

So it's really a matter of bookkeeping you could report 0 open contracts or 1 open contract or 2 open contracts depending on how the firms decided to hold it on the books.

I've studied math but not accounting so I can't vouch for above ...but it just "seems" to be so... Any Board of Option members out there ??
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