Finance Monthly - December 2022

52 Finance Monthly. Inve s tmen t Correspondingly, if META shares go under $130, the call buyer would have lost $300, given that the premium was $3 per share. Put option contracts work the same, but in the opposite direction - betting on the underlying asset to decline after an expiry date. In both cases, the strike price for an option is the price traders pick to exercise the contract. All of thismight sound complicated. However, it’s important to note that such data is readily available on even beginner stock trading platforms which offer both equities and options trading. Using such data points in a trading strategy requires experience, but the tools are available even for novice investors. What Exactly Is Open Interest? Now that the nature of this speculative derivatives market is cleared up, it is much easier to understand where open interest metric fits in. In the options market, open interest measures how many options contracts were issued for a specific stock. More precisely, subtracting opened contracts from closed ones. Case in point: • Meta (META) has 5,000 options contracts. • During the day, traders open 500 new positions, while closing 300 positions. • Additionally, traders exercise strike prices on 100 contracts. • META open interest for the day would then be: 5,000 + 500 - 300 - 100 = 5,100 Of course, stocks are not the only asset that can serve as an underlying asset for options contracts. For example, open interest for Bitcoin counts all the option contracts across major exchanges, leading to $5.9 billion worth of options. However, there is an important difference between stock and crypto-based derivatives. In charge of measuring open interest in stocks is the Options Clearing Corporation (OCC). This Chicagobased clearing house calculates open interest by counting the number of “to open” and “to close” positions: • Buy to open: purchasing either a call or a put contract. • Buy to close: selling either a call or a put contract. The OCC accounts for these positions on a daily basis, which means that open interest is a lagging indicator. During the trading day, the open interest figure remains static, until it is published the morning after the trading session closes. Image credit: 31 Oct 2022, 01:00 Deribit: $5.183B LedgerX: $- FTX: $5.84M CME: $594.066M Okex: $155.861M Huobi: $- $29.61M Total: $5.968B

RkJQdWJsaXNoZXIy Mjk3Mzkz