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Glossary of Terms and Strategies for Options Trading

Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.

Basic concepts

Beginner, Advanced

Open Interest

The number of existing (open) option contracts for a given strike and expiration. An indicator of liquidity and market interest in a given option.

Detail

Open Interest (OI) shows the total number of open option contracts that have not yet been closed, settled, or expired. Each option (by strike and expiration) has its own OI.
- Higher OI means higher liquidity, easier entry and exit of a position, smaller spread between bid/ask.
- Low OI can mean low interest and poor liquidity (higher spread). Important for selecting options to trade.

Open Interest shows how many options contracts are currently open for a given strike and expiration. If OI is increasing, it means that new positions are entering the option. If it is decreasing, contracts are being closed. An important indicator of liquidity — higher OI means better execution, smaller spreads, faster buying/selling. For example, OI 5,000 means 5,000 contracts are open at a given strike/expiration. This is not volume, but the total number of outstanding contracts.

Optimal conditions

Good to watch when entering a trade. Avoid options with low OI (e.g. under 50-100 contracts) as they may have poor liquidity and large spreads. For both put and buy options, prefer options with higher OI (1000+).

Max profit

N/A

Max loss

N/A

Risks

Low OI = risk of poor liquidity and poor execution of the trade. Possible higher spreads (bid/ask difference), longer wait for execution. Risk that the trade will not be able to be closed quickly.

Greeks

N/A

Variations

Volume

Usage example

I want to write a put option on AAPL strike $150. I see that OI = 10,000 → high liquidity, easy exit. Another option on the same strike has OI = 25 → low liquidity, I prefer to avoid it. I always watch OI before entering a trade.

DTE

OI exists for every strike and expiration (DTE) combination. I watch the OI at the given expiration where I want to enter.

IV (implied volatility)

Higher IV can attract traders, so sometimes OI increases along with IV, but it is not a direct relationship.

Premium

Higher OI often means a better bid/ask spread = better premium for the listing.

Margin

N/A

Notes

OI is a key indicator for choosing an option to trade. I watch it along with volume and spread. I avoid low OI due to liquidity risk.

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