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Open Interest

CA Anand Sarda (Working) (1580 Points)

08 July 2008

What are these terms?

Open Interest and VAlue Buying?

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LAKSHMINARAYANAN (STUDENT) (60 Points)
Replied 16 July 2008

Open Interest

	1. The total number of options and/or futures contracts that are not closed or delivered on a particular day. 2. The number of buy market orders before the stock market opens.

	1. A common misconception is that open interest is the same thing as volume of options and futures trades. This is not correct, as demonstrated in the following example: -On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1. -On January 2, C and D create trading volume of 5 and there are also five more options left open. -On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1. -On January 4, E simply replaces C and open interest does not change, trading volume increases by 5.

Value Buying

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated. Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

	The big problem for value investing is estimating intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value. Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth

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