One of the most critical aspects of the renting shares market relates to open interest and liquidity in stock options. This applies primarily to knowing when it is most ideal to purchase stock options contracts that are illiquid in nature. Every contract that applies to an underlying stock option is quoted with the name of the stock, the bid, the last price, the asking price, the volume and level of open interest. The open interest aspect of the stock option contract represents how many contracts are still available when relating to a specific stock.

The open interest when it comes to renting shares in options trading is not something that should be confused with the volume. Volume, on the other hand, represents the number of transactions that have already taken place on a specific trading contract.

When options traders buy call options, the open interest for that call option has increased by one. When that particular options trader makes the decision to sell their call option contract, or if they decide to exercise the call option so that they can close a position, the interest for that particular option will decrease by one instead. This is all there really is to the concept, it is quite simple to learn and understand.

Many people tend to misunderstand how liquidity and open interest are related, and that the stock option contract liquidity is not actually represented at all by the open interest. The best way to measure the liquidity, instead, when it comes to traditional stock trading is through the volume of the stock. The volume of the stock represents how quickly the orders are being filled at the price that a particular trader is looking for specifically.

When it comes to options trading and renting shares, volume is not always regarded as the best measure, because there are options contracts out there that can be extremely liquid in nature even when their volume is relatively low. The next best number that is being turned to with renting shares is the open interest, which is an excellent measure of liquidity for some things, but is not serving as an accurate indicator of liquidity in renting shares. Every single options contract begins with an open interest of 0 when it first launches, and then the open interest slowly builds up as each options contract is purchased by traders.

In other words, an open interest of 0 does not mean that the contract is completely illiquid, even though it appears that it would indicate such. Otherwise, how could traders renting shares build their portfolios up using options contracts with 0 for open interest?

When it comes to renting shares, the absolute best measure for stock option liquidity relates more closely to how fast the market makers are able to trade with you when other option traders are otherwise absent. When stock option contracts first launch with a 0 open interest, if the stock option is still purchased by an options trader, they are buying directly from the market maker who can narrow down the spread between bid and ask if they believe that the option contract will be able to sell quickly.

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