Written by Open interest represents the total number of outstanding options contracts that are yet to be settled or closed. It is a key metric for assessing the liquidity and market activity of an options contract. High open interest indicates a robust level of trading and investor participation, which often translates to tighter bid-ask spreads and lower transaction costs. Conversely, low open interest may suggest limited trading activity, potentially leading to wider spreads and less favorable pricing. Open interest is updated daily and provides insights into the flow of market sentiment. For instance, an increase in open interest combined with rising premiums may indicate bullish sentiment, while decreasing open interest could signal waning interest in the contract. Traders use open interest to validate trends, confirm breakouts, and assess the sustainability of price movements. Additionally, open interest can help identify potential levels of support and resistance based on the concentration of options at specific strike prices. By incorporating open interest into their analysis, options traders can gain a comprehensive understanding of market dynamics, optimize their trading strategies, and make informed decisions that align with prevailing market conditions.
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