What is Open Interest

Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day. Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts. Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.

OPEN INTEREST

Trend
Increase in open interest, Increase in price Increase in open interest, decrease in price Decrease in open interest, increase in price

Decrease in open interest, decrease in price

Indication
New long (buy) positions are being created New short (sell) positions are being created Short positions are being squared off Long positions are being squared off

Open interest refers to the unexecuted/unexpired derivatives contracts at a given point of time. Open interest by itself doesnt reveal much when analysing trends in future contracts. But tracking open interest, along with movement in prices, gives an idea about the trend that the stock is exhibiting. Here, we take a look at how open interest is calculated and also the various trends.

Open interest calculation

When a buyer enters into a derivative contract to purchase a share from the counter party who is taking a sell position, it would amount to addition in open interest of one share. Open interest would rise with every new contract getting initiated. If two existing contract holder reverse their positions, the open interest would decline. If an existing contract holder is liquidating his position while he is being replaced by a new investor buying the contract from him, the open interest would stay constant. On expiry of derivative contracts for a particular series, the open interest will turn nil. (See Shifting Positions)

Trends in Open interest And Prices

Increase in open interest and increase in price. When the open interest of a particular company is rising and it is accompanied by a rise in share price, the stock is said to be inhibiting a bullish trend. Rising open interest reflects increased investor interest in the stock, while the rising price is on account of higher demand for the stock.

Increase in open interest and decrease in price. An increase in open interest accompanied by a decrease in price is not a bullish sign. Though there is increased interest in the stock as reflected by the rise in open interest, the declining price indicates that there is selling pressure. Thus, the rising open interest is on account of fresh short positions being created.

Decrease in open interest and increase in price. When investors square off their long positions, open interest will reduce. The demand for shares to square off the short sold futures will lead the share price to rise.

Decrease in open interest, decrease in price. A decrease in open interest accompanied by a decrease in price reflects covering of long positions. Open interest is declining as investors square off their long positions and the selling is leading to a decline in share price.