Let’s take the example used so far, further. Just like Sita and Noor, suppose 12 other people have agreed to buy houses from 12 other sellers after 6 months. They have also paid a premium to enter into these call option contracts. So the total number of call option contract that are now open is 12+1 = 13. Suppose 2 days later another call option contract is signed, then the open interest increases by 1 to 14. Now let’s assume Sita sells her call option contract to her friend Rita, who is also interested in buying Noor’s apartment. The contract is now between Noor and Rita, however the number of open interest still remains at 14 as Rita merely took Sita’s position as the buyer and did not enter into a new contract.
Hence when an investor who has bought/sold a call option contract does not complete the transaction by subsequently selling / buying the contract, the contract is said to be “open”. Open interest (OI) is the number of contract that are yet to be settled and exist on the books of the clearinghouse / stock exchange.
A single purchase and sale, involving two transacting parties – constitutes an OI of 1. OI is a measure of the flow of money into option market. Increasing OI represents new or additional money flowing into the market. Decreasing OI indicates money flowing out of the market.
Call OI that you see on the screener is the sum of all open call contracts across all the strike prices for all expiry periods. Suppose 15 call options are open across all strike prices that are set to expire this month. Similarly 27 call options are open that will expire next month and 8 open call options will expire the month after that. The total call option open interest is 50 (15+27+8).