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Strategies & Market Trends : Canadian Options
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To: thebeach who wrote (959)4/5/1998 8:32:00 PM
From: Porter Davis  Read Replies (1) of 1598
 
No need for me to 'confirm', you got it spot on. One way to understand it better is to consider this: when a new strike (or month) is listed, no options exist. Only when a buyer and a seller agree on a price and a trade is executed do any options 'exist'. This would be an opening transaction by both the buyer and seller. As time goes by and more trades occur, the open interest in that series would increase. Should anyone wish to end their position, they would buy (or sell) their position 'closing'. Otherwise the clearing corporation would take this to be another opening position, and errors like that can be expensive for the investor. Note that you do not have to buy back your position from the person you originally sold it to, unlike the OTC market. This helps to explain why a large open interest, with lots of different people holding positions, is an important criterion for selecting an option to trade. Hope this helps.

Happy trading.

Porter
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