Open Interest
Definition
Open interest is the total number of outstanding (open) options contracts that have not been exercised, expired, or closed — it measures how much market participation exists at a specific strike price and expiration, and unusually high open interest at a strike often creates a 'gravitational pull' that draws price toward that level near expiration.
Example
“The $50 strike calls had 45,000 contracts of open interest vs. 2,000 at other strikes — clearly where the market was focused. With that much open interest, market makers' hedging activity would create significant buying pressure if the stock approached $50.”
Detailed Explanation
Open interest increases when a new options contract is created (a buyer and seller both open new positions) and decreases when an existing contract is closed (one party closes their position) or exercised. It's distinct from volume: volume counts every transaction during the day (including opening and closing trades), while open interest counts only the net number of contracts still outstanding at the end of the day. A day with high volume but decreasing open interest means traders are closing old positions rather than opening new ones — the market is reducing exposure rather than adding it.
The "max pain" concept in options trading derives directly from open interest. Max pain is the price at which the total value of all outstanding options (calls and puts combined) would expire worthless for the maximum number of contracts — in theory, the price where option sellers collectively retain the most premium. Because market makers are typically net sellers of options (and thus net short options), there's a theoretical incentive for price to gravitate toward max pain near expiration as delta hedging activity pulls price in that direction. While max pain is not a reliable precise predictor of expiration price, significant open interest at specific strikes does create real hedging flows that influence intraday price action, especially on weekly and monthly option expiration days.
Monitoring open interest spikes at specific strikes gives insight into where institutional traders or large speculators have positioned for significant price moves. A sudden large increase in open interest at an OTM call strike can signal someone positioning for a breakout, while a large increase at OTM puts might signal institutional hedging against a major position. "Unusual options activity" scanners that flag abnormal open interest changes are popular tools for identifying potential institutional-driven moves before they happen. The signal is imperfect — large open interest can be hedges rather than directional bets — but it provides context for understanding where big money is concentrated in the options market.