To analyze stocks, we often use option open interest as a means of measuring the relative levels of investor optimism and pessimism.
Open interest is the number of outstanding contracts on an option class or series.
Open interest will increase by one contract when a buyer enters a new long position while the seller is entering a new short position. Open interest will decrease by one contract if a buyer is closing an old short position and the seller is closing an old long position. When gauging sentiment, we're primarily interested in the convictions displayed by the speculative public. To collect options information that is more likely attributable to these speculators, we focus on the front three months of options data, which is where the small speculators tend to gravitate. This is extremely important because we have found that the absolute ratio readings can vary substantially from stock to stock.