• Trading 101: Analyzing Option Open Interest

    by  • March 12, 2013 8:00 am • Trading 101 with Peter Bryans • 4 Comments

    With options expiration this  week, it is usually a good time to touch on the subject of open interest and understanding what large amounts of put and/or call open interest can mean for certain equities. I have previously written about the possibility of increased volatility during expiration week, and why this dynamic occurs. Now, I’d like to focus on open interest at certain strikes and how overhead calls can cause resistance, and how puts below can provide support.

    Calls, which represent the right to purchase 100 shares, are exercised when the option becomes in-the-money (ITM)—i.e. where the stock trades above the strike price. Contrast this to puts, which represent the right to sell 100 shares and are exercised when the stock trades below the strike price—they are then in-the-money (ITM) as well. For the purposes of this blog, I chose two separate stocks, and the first one featured below is the open interest configuration for Metals & Mining firm Vale S.A. (VALE). VALE closed at $18.59 on Monday 3/11, which was below the open interest of the 19-strike calls displayed in the graph. Seeing as these options are out-of-the-money (OTM), it is plausible that this could remain a short-term level of resistance by the end of expiration week.

    Why could this act as a level of resistance? Let us say that these calls were bought-to-open, and that the market maker on the floor of the exchange was the other trader selling these contracts. In order to hedge himself in the event of option assignment, he was most likely buying stock for each of the option contracts he was short. Now, as trading resumes throughout the week, and VALE possibly remains below the $19 level, the market maker will no longer need to be hedged as the options remain OTM and he will avoid being assigned. Eventually, he will liquidate his stock that he was holding as a hedge near this level, and thus provide additional overhead supply (resistance).

    Puts present a similar concept. Take the open interest configuration for U.S. Steel (X) below, and notice the large amount of put open interest at the 20-strike. X closed at $20.74 on Monday 3/11, and the 20-strike puts remained OTM options. Should X remain above the $20 level, we could see support as the market makers remove their hedges for these options that look to finish OTM by the end of expiration week. The puts that were bought-to-open at this strike were likely hedged by the market makers via short selling of the stock. In order to remove their hedges, the market makers are required to buy back (to cover) the stock that they sell short. This can bring increased buying power (demand) above the $20 level, and act as a “floor” for the stock.

    So, in essence, it is important to simply remember this: calls can provide short-term points of resistance, while puts can provide short-term points of support. Try not to over-complicate things, but certainly be aware that large amounts of open interest at particular strikes can have an effect on the underlying equity during expiration week. It is certainly a useful concept to understand.


    Peter Bryans joined the Schaeffer's Investment Research trading team as a Trader in April, 2012. A graduate of the Fisher College of Business at The Ohio State University -- where he concentrated in Finance -- Peter previously held internships with an insurance broker and a wealth-management firm. In his current role, Peter trades a variety of our real-time option services and also hosts our "Options Apprentice" weekly webinar presentations.


    4 Responses to Trading 101: Analyzing Option Open Interest

    1. Daniel Cunningham
      March 22, 2013 10:21 pm at 10:21 pm

      Dear Peter,

      Is there a public/free source for the open interest configuration charts you display above?

      Thanks for your energy & efforts on these articles.

    2. Anil
      March 16, 2013 12:41 pm at 12:41 pm

      Hi Peter,

      Nice article…. but I want to ask one thing that – Does options work like magnet, i mean if market is trading at a level and suddenly there is significant increase in OTM put options and market started to going that side and if market is going in the downside and still the same strike is continuously fresh build up of put options, it will work as a strong support. I am testing this thing from a few days and it is going right. what does that mean. if you can tell me and the same magnet system as i have told for put options it works for call options too.

    3. Peter Bryans
      March 14, 2013 7:38 am at 7:38 am

      Thanks for reading, Martin. Sorry for the trouble in regards to the images loading. We believe it may have been a short-term glitch with our host. Hopefully you can see the graphs now.


    4. Martin
      March 13, 2013 5:24 pm at 5:24 pm

      I wish you used charts I could load. Don’t have this trouble with any other bloggers. I tried two different browsers. The topics are of interest, but without the charts they just miss the point.

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