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Open Interest

Open Interest

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Open interest refers to the total number of outstanding derivative contracts, specifically futures and options, that are held by market participants at the end of each trading session.

What Is Open Interest in Futures?

Open interest refers to the total number of outstanding derivative contracts, specifically futures and options, that are held by market participants at the end of each trading session. Unlike stocks, where the number of issued shares stays constant, the supply of futures contracts fluctuates daily based on market activity. 
As traders open new long or short positions in a futures contract, open interest increases. When traders offset existing positions by taking the opposite side, open interest declines. So in essence, open interest represents the flow of money into and out of the futures market - rising open interest signals new money entering, and falling interest indicates liquidation.

How Do Exchanges Calculate Open Interest? 

Exchanges like CME Group use a simple daily calculation:

Open Interest = Prior Day's Open Interest + New Positions Opened Today - Old Positions Closed Today

For example, say yesterday's open interest was 100 contracts. Today, some traders opened new long/short futures, increasing open interest by 15 contracts. However, other traders exited existing positions, decreasing open interest by 10 contracts. The new open interest reading would be:  

100 + 15 - 10 = 105 contracts

So despite lots of trading volume during the day, open interest only changes based on the formation/liquidation of positions.

Why Should Traders Analyze Open Interest Trends?

While less visible than price or volume, understanding open interest trends offers traders key insights, including:

  • Assessing market liquidity and interest

  • Confirming the strength or weakness of price trends  

  • Spotting when major players like institutions enter/exit

  • Identifying market tops and bottoms

For example, rising open interest signals new money flowing in and more interest in the futures contract - likely confirming an upward price trend. Declining open interest over time warns of waning market interest and a weakening upside move.

What's the Difference Between Volume and Open Interest?

Volume represents the number of contracts traded during a period. If 100 contracts are bought and then sold back and forth, the volume would rise by 200 contracts while open interest stays flat. 

Volume indicates market activity but not positions. Open interest measures total open positions only, excluding back-and-forth trading that doesn't impact open interest. So volume offers little insight unless paired with open interest data. 

What Market Insights Can Traders Gain From Open Interest Patterns?  

Analyzing open interest trends reveals the conviction level of trends and potential reversals:

Rising Open Interest + Rising Prices + Rising Volume = Market is Strong

Falling Open Interest + Rising Prices + Falling Volume = Warning of Weakness   

Rising Open Interest + Falling Prices + Rising Volume = Market is Weak

Falling Open Interest + Falling Prices + Falling Volume = Market is Strengthening

Can Open Interest Indicate When Institutions Enter or Exit Trades?

Yes, the CFTC's Commitment of Traders reports break down open interest positioning among major futures players– including producers/users, banks, and funds. 

Watching changes in the composition of open interest shows when larger traders are ramping up or reducing exposure. For example, a surge in open interest from asset managers signals significant institutional money flowing into the futures contract.

Futures

A futures contract is a standardized legal agreement to buy or sell a particular commodity or asset at a pr...

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Derivatives Market

A public market for derivatives, instruments such as futures contracts or options, which are derived from o...

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