When selling call and put options, the liquidity of these securities must be evaluated to determine their eligibility. There are two measures of investor interest in options, Vol(ume) and Open Interest (OI). Vol represents the number of times a particular contract is bought or sold in a particular day. Open interest, on the other hand, represents the number of contracts that are currently outstanding (unexercised, not closed by an offsetting contract or not yet expired). Open interest stats are cumulative and not reset to zero each day as are Vol stats. Therefore, it makes sense that open interest will (almost) always be higher than Vol stats.
Location of OI in an options chain
There is no way of knowing the amount of open interest contracts represented by buy or sell orders.
Why is OI important?
When options have large open interest we know that there are a significant number of buyers and sellers and a robust secondary market increasing the odds of a favorable price execution for our options. This is why we use a guideline of a minimum of 100 contracts of OI and/or a bid-ask spread of $0.30 or less when evaluating the eligibility of options.
How is OI calculated?
When options are bought or sold they can be an opening or closing transaction. Open interest is calculated at the end of a trading day by the Options Clearing Corporation (OCC)after pairing opening and closing positions. The screenshot below shows how these calculations are done per contract:
Evaluating option liquidity is essential for all option traders. Open interest has the advantages over Vol(ume) in that it is a cumulative stat (not reset daily as is VOL) and provides a window into the extent of the secondary market for a specific option. OI calculations depend on whether buyers and sellers are opening or closing positions.
Upcoming live events
September 10th, 2016
Silicon Valley (San Francisco) California
8:30 AM – 12 PM
I am the 2nd of 2 speakers
September 29th, 2016
9 PM ET
Blue Hour webinar 2: “Using Put Options to Buy and Sell Stock”
FREE to premium members and available for purchase to general members
Registration links and more information to follow
October 17th, 2016 (originally 10/24)
Registration link to follow
November 5, 2016
Plainview, New York
Saturday morning 3-hour workshop at the Plainview Holiday Inn. I am the only speaker and plan an information-packed presentation covering 5 actionable ways to make money or buy a stock at a discount using both call and put options. Discounted fee through 8/31/16.
Save the date: Our next Blue Hour webinar, FREE to all Premium Members, will be broadcast on 9/29/2016 at 9 PM ET. The topic is Using Put Options to Buy and Sell Stock. This a new presentation which will be presented for the first time on September 29th. Registration will open in a few weeks. You will receive notification.
Premium members: Blue Chip Portfolio
Based on the recent premium member survey many of you responded to, there is an interest in a report specifically geared to blue chip stocks for option-selling strategies. The BCI team is considering adding an additional quarterly report where we screen the 30 Dow Jones Industrial stocks for price performance in 3-month and 1-year time frames and select those that have out-performed the S&P 500 in both screens.
The report will include price at the time of report publication, % returns in both time frames, earnings report dates, dividend yield and ex-dividend date information.
I have placed a draft of this report in the “Resources/downloads” section of the member site (right side of page). Scroll down to “B”…Blue Chip Report: 8-2016. Let us know your thoughts to help us to decide if we will be adding this report to our member benefits package (at no additional membership charge). Thus far the feedback has been extremely positive.
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Global stocks were flat on the week, with many investors waiting for US Federal Reserve Chair Janet Yellen’s remarks from Jackson Hole on Friday morning. The Chicago Board Options Exchange Volatility Index (VIX) rose to 13.65 from 11.8 a week ago. Crude oil fell to $47.65 from $48.00 a week ago. This week’s reports and international news of importance:
- Speaking at the Federal Reserve Bank of Kansas City conference in Jackson Hole, Wyoming, Fed chair Yellen prepared markets for a hike in the federal funds rate perhaps as early as the next Federal Open Market Committee meeting in September, depending on the outcome of next Friday’s US employment report. Markets are assuming a hike by the end of 2016
- A poll of more than 7,000 German businesses saw a decline in confidence among those surveyed. The Ifo index fell to 106.2 in August versus 108.3 a month earlier, the steepest fall in more than four years. The weakening sentiment was blamed on a delayed reaction to the UK’s June Brexit vote
- Sales of new homes in the US surged 12.4% in July to the highest level since October 2007, and 31% compared with a year ago
- However, sales of existing homes, which outnumber new home sales by a factor of eight, fell 3.2% in July
- 2nd quarter US GDP was revised modestly lower, to an annual rate of 1.1% from an initial 1.2% reading
- The US trade deficit shrank in July to $59.0 billion from $63.3 billion in June
- Durable goods orders were surprisingly strong, rising 4.4% in July versus a consensus estimate for a 3.7% rise. Core capital goods orders rose a robust 1.6%
- UK Consumer sentiment rebounded strongly in August, more than reversing the post-Brexit shock from July, jumping to 109.8 from 106.6. The rise was the largest in over three years
- A week ago, the oil market rallied on hopes for an OPEC production cap. This week, OPEC member Iraq said it will boost production by 150,000 barrels per day, or roughly 5% of output
- Urjit Patel was named this week to succeed Raghuram Rajan as the new governor of the Reserve Bank of India. Patel was deputy governor in charge of monetary policy prior to his appointment to the top spot, and is well known to the markets
- Credit rating agency Standard and Poor’s downgraded its outlook for Mexico’s sovereign debt rating this week, citing disappointing economic growth and a rising debt load
THE WEEK AHEAD
- The US reports personal income and spending and the core personal consumption expenditures price index, the Fed’s preferred inflation measure, on Monday, August 29th
- The eurozone economic sentiment index is released on Tuesday, August 30th
- The harmonized index of consumer prices for the eurozone is released on Wednesday, August 31st
- Global manufacturing purchasing managers’ indices are released on Thursday, September 1st
- The US August employment report is released on Friday, September 2nd
For the week, the S&P 500 declined by 0.68% for a year-to-date return of +6.12%.
IBD: Uptrend under pressure
GMI: 6/6- Buy signal since market close of July 1, 2016
BCI: Moderately bullish favoring out-of-the-money strikes 3-to-2
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US