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Open interest basics

Open interest?

Open interest is commonly associated with the futures and options markets.

Open interest is the total number of outstanding derivative contracts, such as options or futures that are currently open and yet to be squared off.

It’s important to note that open interest equals the total number of contracts, not the total of each transaction by every buyer and seller. In other words, open interest is the total of all the buys or all of the sells, not both.

To give it in terms of numbers, say the current open interest for nifty futures is 123,00,000 this means that there are these many contracts open in nifty futures at the current time.

Now we are aware that what open interest means, let’s move on to the next section which is change in open interest

Change in Open interest:

The number of existing contracts(OI) changes real-time based on trading activity.

If a buyer and seller come together and initiate a new position of one contract, then open interest will increase by one contract. Should a buyer and seller both exit a one contract position on a trade, then open interest decreases by one contract. However, if a buyer or seller passes off their current position to a new buyer or seller, then open interest remains unchanged.

From this explanation you should be clear that open interest can remain unchanged even after there is addition in volume because that volume might be a passing of the current positions which doesn’t result in a change in open interest.

Also increasing open interest represents new or additional money coming into the market as it requires a fresh buyer/seller to create a contract while decreasing open interest indicates money flowing out of the market as it requires square off of positions between the existing positions. 

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