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What is Open Interest?

An option's open interest represents the total number of contracts that are "open" between any two parties. In other words, open interest is the number of option contracts that have been opened, but not yet closed. Let's run through a basic example to demonstrate how open interest works.
Consider the following trade orders that are routed by two different traders, but on the same option contract:


Trader
Order
Opening / Closing Order?
Open Interest
A
Buy 5 Contracts
Open
5
B
Sell 5 Contracts
Open
Here, Trader A is buying 5 contracts to open and Trader B is selling 5 contracts to open. If both traders are filled on their orders, the option's open interest will increase by 5 because two traders have opened positions in that contract.
What happens when one of the traders closes their position while another trader opens a position? Consider the following trades:
Trader
Order
Opening / Closing Order?
Open Interest
B
Buy 5 Contracts
Close
5
C
Sell 5 Contracts
Open
As we can see here, Trader B bought 5 contracts to close while Trader C sold 5 contracts to open. In this case, open interest remains at 5 because there are still 5 contracts open between Trader A and C. However, if Trader A sells 5 contracts to close and Trader C buys 5 contracts to close, open interest will decrease by 5:
Trader
Order
Opening / Closing Order?
Open Interest
A
Sell 5 Contracts
Close
0
C
Buy 5 Contracts
Close
So, open interest represents the number of option contracts that are open in the market between two parties, though you don't need to be concerned about the specific parties.
In summary, open interest increases when two parties get filled on opening orders, and decreases when two parties get filled on closing orders. When one party has an opening order and the other has a closing order, opening interest will not change (assuming both orders have the same number of contracts).
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