Glenn,
Thanks for your post. Without meaning to belabor the issue, permit me to clarify my "algebraic theory"
OPEN INTEREST equals (Number of opens minus number of closes)divided by 2. this is updated with every single "transaction pair" (see below)
To quote your post,
" ...Suppose I have 100 shares of USRX. ... I call my broker and ask him to write up this new contract. Clearly, the open interest goes up by 1 contract. ... Now, if someone bullish on USRX buys the contract I have for sale, does the open interest go down by one? ..."
---No. In fact I am assuming your writing of one contract to the buyer was you ("S") "selling to open" and "B" "buying to open".
According to my rule you have (1 open+ 1 open)/2= 1 open contract.
"... ie, does open interest indicate the number of contracts available for sale, or does it indicate the total number of contracts outstanding? "
--the total number of contracts outstanding. But I am defining a contract as being composed of two ingredients: one buyer and one seller.
"... Open interest indicates the number of contracts that are open positions."
---- I agree.
" ... be more clear. You sell a call to "open contract". You now have an open ontract 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."
---- According to my definition it depends how the fella sold this contract. He obviously needed a buyer to be able to sell the contract. Assuming he originally bought the contract "to open"
there are four possibilties
(i) he (still nicknamed "B") sells to close and the new buyer "Z" buys to open : then (-1)+(+1)/2=0 no change in the (published) OPEN INTEREST.
(ii) B sells to open and the new buyer "Z" buys to open. This is possible and would leave B both long and short one contract until such time as his broker cancels out his position... Until that time you have incremented the outstanding OPEN INTEREST by one.
(iii) B sells to close and Z buys to close : then (-1)+(-1)/2= -1
the OPEN INTEREST decreases by one.
(iv) B sells to open and Z buys to close. B will then have a long and short contract which could be canceled out by his broker, but until that time there is no change in the OPEN INTEREST as in (i).
--To summarize I am considering every transaction as a pair, namely a linked buyer and seller and only if they are both doing the same operation [ both opening or both closing] does the OPEN INTEREST CHANGE. [ +1 or -1 respectively]
We may both be saying the same thing but in different words.
David R. |
