Q: Does an increase in open interest imply a bullish sentiment?
Let’s suppose 100 new call contracts are opened. There are 100 long contracts and 100 short contracts, but the buyer is not necessarily making a standalone bullish bet and the seller is not necessarily bearish. Either side can be hedging or combining the call with other positions. The count alone therefore does not establish sentiment.
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The same call activity can express different intentions
A purchase of 100 calls might be an outright bullish position, protection for short stock, a closing trade against earlier short calls or one leg of a spread. If both sides open, open interest rises by 100 regardless of those motives. If the seller closes existing longs, it may not change.
Imagine a trader buying 100 $100 calls and selling 100 $105 calls. Looking only at the bought calls suggests uncapped upside exposure; the complete bull spread caps its expiration gain. Another trader buying those same calls against short shares can have much smaller or even negative net delta. The option print alone does not reveal the combined portfolio.
A trade near the ask can help estimate which side initiated it, but it does not establish whether that side opened or closed, nor whether a related stock or option trade changed its meaning. Complex-order execution can make leg prices especially difficult to classify.
Use open interest as a map of outstanding contracts. A sentiment interpretation needs additional data and explicit assumptions about ownership, strategy and hedges. Label an inferred signal as an inference, and test how its conclusion changes under alternative ownership assumptions.
