Interpreting Option Open Interest as Liquidity or Attention

Summary

The document raises a question about what option open interest represents across different stocks. For small-cap options, the author sees open interest mainly as a sign of liquidity. For highly traded large-cap names, where liquidity may be less limiting, the author suggests it could instead reflect investor attention.

It asks how option-based signals perform when open interest is controlled for, but provides no analysis, trading method, results, or evidence to resolve that question. The distinction is a hypothesis to test: open interest may proxy for different market characteristics depending on the underlying stock and trading context. Any conclusion would require empirical work that separates liquidity effects from attention effects and evaluates the signals across relevant stock groups.

Key ideas

• Open interest may serve as a liquidity measure in options on small-cap stocks.
• For liquid large-cap options, open interest may instead capture investor attention.
• The document proposes controlling for open interest when evaluating option signals.
• No empirical results or specific testing method are provided.

Tags

# to interpret open interest


# to interpret open interest












I am interested to ask about how to interpret option open interest. For small cap stock options, it makes sense to see open interest as liquidity.

On the other hand, for big name stock options where liquidity is not really a concern, open interest seem better to be interpreted as a measure of attention. wonder how these option signals would do if controlled open interest

Thanks

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.