What Open Interest Can and Cannot Tell You

Open interest is the number of option contracts of a given strike and expiration that are currently outstanding — opened and not yet closed or expired. It is one of the most quoted numbers in options analysis, and it is genuinely useful: it tells you where activity has accumulated, which strikes carry the most outstanding exposure, and how that exposure builds or unwinds over time.

But there is a hard limit to what open interest can tell you, and getting this limit right is the single most important honesty point in this entire track.

Every contract has two sides — open interest hides which is which

Open interest counts contracts, and every contract has a buyer and a seller. A strike showing 5,000 contracts of open interest tells you 5,000 contracts exist. It does not tell you whether the market maker is long them, short them, or flat because their customer positions offset. The same open-interest number is consistent with completely opposite dealer positions.

This is why sizing a "dealer gamma" number straight off raw open interest requires an assumption — usually that customers are net buyers of options and therefore dealers are net sellers. That assumption is often reasonable, and it is not always right. When it is wrong, a positioning read built on it points the wrong way at precisely the moments it matters most.

Some venues publish data that does sign it

The limitation above is a limitation of open interest, not a law of nature. Certain exchanges publish exchange-tagged participant data — breakdowns that separate volume or open interest by the type of account behind each trade (market maker, firm, broker-dealer, customer). Where that data is licensed and available, you no longer have to assume who is on which side; the tagging tells you. This is a real, meaningful distinction between a positioning read that guesses the dealer's side and one that observes it.

That data is not universally available. It is licensed, it covers specific products, and it is not something every analysis platform has. So most dealer-positioning tools in the market — including surfaces you will see elsewhere — are working from open interest plus assumptions, whether or not they say so.

How we handle it here — stated plainly

Stating this is not a hedge; it is the correct reading of the mechanics. A model of dealer positioning can be useful precisely because it is explicit about its assumptions — you know where it could be wrong and can watch for those conditions. A number that hides the assumption behind a confident label is more dangerous than a modelled estimate that shows its work, because it invites you to trust a guess as if it were an observation.

What open interest is still good for

None of this makes open interest useless — far from it. It reliably shows where outstanding exposure sits, which strikes are crowded, and how positioning migrates as expirations approach. Combined with price and with the hedging logic in the next lesson, it supports a genuinely useful map of where mechanical pressure is likely to concentrate. The discipline is simply to remember what it does not contain: the sign of the dealer's position. Read it as a map of exposure, treat any dealer-side inference as a model, and you will be reading it honestly.