So if you’ve been trading options or stocks, you might have heard the concept of open interest. I want to share the whole point behind open interest, why it is important, and find it. We’re going to go ahead and take a look at the ThinkOrSwim platform.
If we go into trading stock, you can see there’s Facebook right here.
Here we have an open interest. Now, if you don’t see the open interest, let’s say over here, it says Probability in the money (ITM).
I could go into Basic Price and Quotes > Open Interest.
That will show you the number of contracts that are out and available. It’s not to say that they can’t be more creative, but it’s kind of like who’s holding the bag of what. If you’re in a fruit stand or a grocery store, is there a surplus of bananas? Is there a lot of oranges?
If there’s a certain surplus, that means it’s easy to buy it or choose the type you want. So, in this case, it’s the same thing; open interest means how many people have those contracts. That means it is easy for you to get in or out of those things as needed.
So herewith Facebook, as you can see, the 57-day option contracts here.
This one at the 260 has 1359.
Now, why do you think 260 has 1,359 versus 255 has 1,405 versus 250 has 2,857? Well, it’s probably because it’s closer to the current price. But then you might wonder how come this one right here is closer to the money.
If we’re looking at this approach, 245 is even closer, but it has less contracts.
Why is that? Well maybe it’s because it’s not a round number. You can see 250 is a nice solid round number.
So a lot of people are concentrating their positions around 250. Even the 240 may be a little bit of a round number and it’s close to the price but it only has 702. What you’ll notice is depending on previous stock performance depending on how things have worked in the past.
You may or may not have more or less contracts at certain point like here.
You could see we’re decaying or deteriorating a bit more on these contracts.
Why?
Well we’re at the 290 over here and what about this one this one at the 300 level We jump to 878 contracts and then the one right after it at the 305 has only 61.
So if I’m kind of interested in the 300.
Between 290 and 310, which one would I choose? I’d probably choose the 300 because it’s a lot easier to get in and get out. That means I can probably get a better bid-ask spread or fill rate.
So when you’re looking at these prices and means you can probably get in and out of it a lot easier than you can with maybe something else. There’s just more contracts, more demand, more availability and more people are interested in that.
That’s what they’re kind of looking for.
So anyways that’s really what open interest is all about. Sometimes you don’t have trouble getting into the trade.
But what if you need to get out?
If you’re stuck in something that trades a really few shares or really few contracts, that could be a problem. Now here we’ve got a thousand two thousand contracts I’m going to show you here.
Here let’s go to 25 and you can see there’s thousands of contract. Then you could go with something else like let’s say CMG Chipotle Mexican Grill.
We’ll go to this one you can see there’s only 21, 8 and 26 contract.
So I would be much more concerned about trading a CMG on the open interest than I would with Facebook.
Let’s look at AT&T here.
If you look at these contracts you can see seven thousand. Nobody you can see quite a lot of contracts. Here’s JCPenney, okay this one’s got two hundred, four hundred and then zero.
But there’s not a lot of premium. So what I trade options on JCPenney that’s 18 cents? No. How about let’s see Uber right here.
$34 a share and you can see is about a 600, 200, and 2500 contracts. Those are pretty good. Let’s look at GoPro.
Also about a thousand. Let me see if I can find one, what you can do is go in.
Look at scan and let’s say favorite optional, we go to FFIV let’s see what that one looks like.
Here a lot less contracts. How about ISRG.
You can see a lot less contracts as well. Even Google here trades very few contracts.
So you need to be a little more careful when trading stocks that have a lot less open interest because the liquidity is just not there.
You’re looking at things like an Apple, you’ve got thousands of contracts.
A lot of people are trading it. It should be very easy getting in and out of those trades without a problem.
Final Thoughts
So anyways I hope you find this video helpful give you some things to think about. Stick to stocks and options that are a little bit more have a higher open interest.
They’re usually the more popular ones and that’ll help you avoid getting into some trouble.
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