David,
You did a good job with your explanation of open interest. However, it is incorrect. I stand by my prior post due to the fact I talked to the option trader used by my brokerage firm on Friday to confirm exactly how open interest is calculated.
Here it is again:
Suppose I have 100 shares of USRX. I want to write 1 call contract for
April 60s. So, I call my broker and ask him to write up this new
contract. Clearly, the open interest goes up by 1 contract. I hope I am
correct on this.
You are correct on this.
Now, if someone bullish on USRX buys the contract I have for sale, does
the open interest go down by one?
ie, does open interest indicate the number of contracts available for
sale, or does it indicate the total number of contracts outstanding?
Open interest indicates the number of contracts that are open positions.
That may have redundant sound but this may be more clear.
You sell a call to "open contract". You now have an open contract and
you have added one to the number of open interest. Your one contract you
added will always be there unless you buy the contract back to "close
contract". It does not matter who buys or again sells the original
contract you wrote. You are the only one that can close that contract or
reduce the open interest by one.
Next, suppose the fella who bought my contract turns bearish and decides
to sell the contract which I originally wrote. What happens to open
interest now?
The open interest is still 1.
No, the open interest is still one."
Glenn |
