Kirpal Singh Fatani

Key Takeaways

Open interest (OI) is the total number of active futures and options contracts that have not yet been closed or settled.

It shows how many traders have open positions that are still live.

When open interest goes up, it usually means new money is coming into the market. When it goes down, it suggests that money is leaving.

Open interest helps us understand how much interest and activity there is in a trading pair (contract), but doesn’t directly tell us where prices will move.

It’s different from trading volume, which counts all contracts traded in a period. Open interest counts only the contracts that remain open.

Introduction

If you're trading futures or options, you've probably heard about open interest. It’s a concept that tells you how many contracts are currently active and unsettled in the market. This helps traders understand how much attention a particular contract is getting and how liquid (or easy to trade) it is.

In this article, we'll explain what open interest means, how it works, why it matters, and how it compares to other related terms like trading volume.

What Does Open Interest Mean?

Open interest refers to the total number of futures or options contracts that are still open and haven’t been closed by offsetting trades, exercised, or expired. It represents the amount of ongoing positions in the market.

To put it simply, if you buy a futures contract and someone takes the opposite side by selling that same contract, open interest increases because there’s now a new active position. If one trader sells a contract and another buys it, but the buyer is closing an existing position, open interest stays the same.

For example, imagine a situation where no contracts are open, and a trader buys 10 new contracts. This raises open interest to 10. Later, if 5 contracts are closed and 10 more are opened, open interest grows by 5 to reach 15.

How Does Open Interest Change?

Open interest changes every trading day, based on how many positions traders are opening or closing:

Open interest grows when more new contracts are created than closed. This usually means new participants are entering the market or traders are adding to their positions.

Open interest shrinks when more contracts are closed or settled than new ones opened. This may show people are leaving the market or reducing their exposure.

Open interest doesn’t change when contracts are just passed from one trader to another without new positions being opened or closed.

Changes in open interest can help traders understand the flow of money and market sentiment.

Open Interest Compared to Trading Volume

Open interest and trading volume are often confused, but they mean different things:

Trading volume counts the total number of contracts traded in a certain period, no matter if they’re new or closing positions. It shows how busy or active the market is.

Open interest counts how many contracts are still active and open at a particular moment. It reflects how many positions remain live.

For example, if a trader sells 10 contracts to another trader who just bought them, volume goes up by 10, but open interest stays flat because, effectively, positions just changed hands.

Why Is Open Interest Important?

Open interest is helpful because it gives clues about how liquid a market is, i.e., how easy it is to buy or sell without affecting prices too much. A higher open interest usually means more participants and better liquidity.

It also gives a hint about market sentiment. If open interest rises alongside prices, it could suggest the upward trend is supported by a new inflow of money. If open interest rises but prices fall, it might indicate an increasing selling pressure.

Still, open interest on its own won’t tell you if prices will go up or down. It’s best used together with other signals and analysis tools to reduce risks.

Closing Thoughts

In futures and options trading, open interest is a key metric that shows how many contracts remain open and active. Watching open interest helps traders understand how much attention a contract is attracting and how liquid it is.

While it doesn’t directly tell you where prices are headed, changes in open interest can show if new money is coming into the market or investors are pulling out. Combining this information with other tools can help you make better trading decisions.

Further Reading

What Is Options Trading?

What Are Funding Rates in Crypto Markets?

What Is Basis Trading and How Does It Work?

What Is Crypto Market Sentiment?

What Is Liquidity and Why Does It Matter?

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