Open Interest: A Practical Guide to Understanding Market Sentiment, Liquidity, and Trade Setup Quality

When most options traders start out, they focus on things like strike selection, expiration, delta or probability of profit.

But there’s one critical data point that often flies under the radar—despite offering valuable clues about trade quality, sentiment, and institutional positioning:
👉 Open Interest (OI).

In this article, we’ll demystify open interest, explain what it does and doesn’t tell you, and show how to use it as a powerful tool for smarter, safer trades—whether you're just getting started or refining your strategy.

🧠 What Is Open Interest?

Let’s start with the basics.

Open Interest is the total number of active option contracts that haven’t been closed, exercised, or expired. Each time a buyer and seller open a new trade, OI increases by one. When one of them closes the trade, OI decreases by one.

Think of it this way:

• Volume = how many contracts traded today

• Open Interest = how many contracts are still “open” and active right now

If you’re looking at an option with a lot of volume but little OI, that may just be day traders entering and exiting quickly. But if volume and OI are both rising, it likely means new interest is building at that strike.

🧪 Why Open Interest Matters

Here’s why open interest is so important to options traders—especially premium sellers:

1. It Shows You Where the Action Is

When open interest is high at a certain strike, it means there’s significant positioning there. That could suggest:

• A key price level where traders expect action

• A potential magnet where price may pin into expiration

• A signal that institutional traders are involved

2. It Tells You If the Option Is Liquid

If you're trying to sell premium and the option you're trading only has 23 contracts of OI… good luck getting a fair fill.

High OI means:

• Tighter bid/ask spreads - Liquidity

• Faster fills

• Less slippage

3. It Helps You Avoid Rookie Mistakes

Low OI options often have poor execution. You might try to sell a call for $1.20, but the market’s so thin that you only get $1.00—or worse, the order doesn’t fill at all. That can kill your edge and waste time.

🛠 How to Use Open Interest in Practice

Here are several ways I personally use open interest in my own premium-selling strategies—and how you can, too.

✅ 1. Check OI Before Placing Any Trade

This is step one before placing iron condors, credit spreads, strangles, or covered calls.

Ask:

• Is there enough OI at the strikes I’m trading?

• Are the bid/ask spreads tight?

• Is volume confirming that these options are actively traded today?

If not, look at nearby strikes or choose a more liquid underlying.

✅ 2. Use OI to Spot "Crowded" Strikes Before Expiration

High OI at certain strikes—especially in monthly options—can act as magnets. Price has a tendency to "pin" to those levels into expiration, especially if market makers are hedging exposure.

That can help you:

• Avoid trades where price might get stuck near your short strike

• Set up short spreads just outside crowded zones

✅ 3. Spot Shifts in Sentiment or Hedging Behavior

Rising OI, especially in out-of-the-money puts or calls, can signal something under the surface:

• Fear? Big OTM put OI rising while IV increases might suggest hedging.

• Greed? OTM call OI surging in a rising market could mean speculative bullishness.

This is particularly useful around earnings or macro events (Fed announcements, CPI reports, etc.).

🔄 Real Example: Open Interest in Action

Let’s say you’re looking to place an iron condor in QQQ.

QQQ is trading at $480. You want to sell:

• A $440/$435 bull put spread

• A $520/$525 bear call spread

Before placing the trade:

• You check OI at $440, $435, $520, and $525

• You see 20,000+ contracts at each strike with decent volume

• Bid/ask spreads are tight, and your order fills at mid-price

✅ That’s a green light.

But if you saw:

• OI below 100 at the $440 strike

• $0.40 wide bid/ask spreads

• Barely any volume on the put side

Then it’s time to either adjust your strikes or find a better ticker. That being said, in QQQ this rarely, if ever, happens.

⚠️ What Open Interest Doesn't Tell You

Let’s be clear: open interest is not a crystal ball. It doesn’t predict direction, and it doesn’t tell you if traders are long or short.

• A large OI doesn’t mean “smart money” is bullish or bearish

• It only tells you that positions are open and active

🎯 Final Thoughts

Open interest is like the market’s footprint. It shows where traders have already committed—and where liquidity lives.

When used properly, it helps you:

• Avoid illiquid options

• Spot key strikes where price may stall or pin

• Time entries and exits around market structure

At The Option Premium, I treat open interest as a core risk filter—not a headline indicator. It won’t grab attention like earnings or IV spikes, but it often tells you what really matters: where the crowd is positioned, and how confidently they’re standing there.

👉 Next time you're ready to enter a trade, don’t just check the greeks. Check the open interest.

It might just save you from a bad fill—or give you a better one.

Probabilities over predictions,

Andy Crowder

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