A:

A high open interest of options provides investors and traders with useful information to consider when entering options positions. The open interest of options contracts indicates the amount of contracts that have not been closed or exercised and delivered on a specific day. As opposed to options trading volume, the open interest is not updated during the trading day.

If an equity, or stock, option has high open interest, it indicates there are a lot of traders and investors interested in that specific equity option. If a stock option has high open interest, it indicates there may be greater liquidity. Therefore, there may be a narrower bid-ask spread, and it is easier to get the option order at an acceptable price.

For example, suppose you look at options on Apple Inc. when the stock's price is trading at $124.00 and see the open interest of the April 125 call options is 12,000. This indicates the market is likely to be active, and there may a lot of investors in the marketplace who want to trade. The bid price of the option is $1.00 and the offer price of the option is $1.05. Therefore, it is likely you can buy one call option contract at the mid-market price.

On the other hand, suppose you look at the April 150 call options and see the open interest is 1. This indicates there is very little open interest on those call options and there is no secondary market, because there are very few buyers and sellers. Therefore, it is difficult to enter and exit those options at good prices.

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