Yes, I'd say that if an "old long" (one unit of open interest) stays long but then also opens a short position, OI increases to 2 units. But I don't see why this is a problem, or why it "artificially" inflates the OI number. The guy's still got two open contracts, either one of which he could close at any time, in which case OI would fall back to 1 unit.
Janice,
I call up my broker say "sell 1,000 contracts of the USRX April 75 calls to open. Also buy 1,000 contracts to open." If another party (on the opposite end) is doing the same thing (buying and selling 1,000 contracts to open) the OI increases by 2,000 in the newspaper but there is effectively no real monetary obligation by either party. No money need change hands. ( if the buy and sell is at the same price)
At any point either of these parties can internally remove any part of the position e.g. by saying "sell 900 long calls to close and buy 900 calls to close" . If this party is doing these two transactions with himself then it will be [(-900) + (-900) ]/2= drop of 900 in open interest. In fact if it is permitted to "do the transaction with oneself" two parties may not even be necessary to initiate the position. One person could singlehandedly raise or lower the OI at whim!
It is sort of a fictitious position, wouldn't you say?
David R. |
