The total number of outstanding or unliquidated contracts at the end of the day is known as open Interest.
This means, by knowing open interest (OI) numbers, you will know how many contracts are currently open or held by buyers or owed by sellers in any derivative market, such as futures or options..
Open interest applied primarily to future markets.
A contract must have a buyer and seller. Therefore both buyers and sellers combine to create only one contract.
When a seller sells one contract to the buyer, it means the buyer is long on the contract and the seller is short on the same contract. In this case, the open interest is 1.
Transfer of contact from one person to another does not increase the open interest as no new contracts are created.
Open interest will be increased when new contracts are entered by market participants. It decreases when old contracts are liquidated.
If one person is liquidating a trade while the other is initiating a new trade, then open interest will remain unchanged.
In summary, open interest rises when fresh money enters the market and falls as current bulls and bears start leaving the market.
The increase or decrease in open interest is watched very carefully by market participants in order to know what’s going to happen next. Net change in open interest will let you know whether money is flowing into or out of the market.
Here is how technical analysts interpret change in price and open interest;
| Price | Open Interest (OI) | Market Participant’s perception |
|---|---|---|
| increases | increases | New money is flowing into the market or more traders are on the long side, therefore considered as bullish |
| decreases | decreases | Losing longs are covering their position, known as long unwinding. Market is bullish. |
| decreases | increases | More traders are on the short side. Downtrend may continue and be considered as bearish. |
| increases | decreases | Short covering, it means holders of losing short positions are covering their position. Money is leaving the market, hence the bearish signal. |
Some technical analysts compare volume with open interest to know the strength of the market.
Links to track open interest;
