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Open Interest

: Summary

Open Interest - Definition

Open interest in futures trading is the total number of open futures contracts in the market.

Open Interest - Introduction

Open interest, also known as Open Commitments, is the total number of futures contracts that has been entered into and are still open in the market. Futures contracts that are still open in the market refers to futures contracts that have been entered into but has yet to expire or be offsetted. This is totally different from volume transacted.

Open interest is one of the first piece of futures trading data that never fails to confuse beginner futures traders.

This tutorial shall explore the nature of Open Interests and how Open Interests work in futures trading.

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What is Open Interest in Futures Trading?

Unlike stock quotes that come with only volume and price data, futures contracts come with another piece of data known as "Open Interest". Open interest records the number of futures contracts that are still open in the marketplace. A futures contract is always entered into by two parties, a long and a short. This creates an open contract to trade the underlying asset at a specific price that is guaranteed by the clearinghouse. This open contract is known as open interest and is an indication of liquidity of a particular futures contract. Generally, the higher the open interest, the higher the liquidity.

How Is Open Interest Different From Volume?

Open interest is totally different from volume because volume transacted, like in stock trading, is simply a measure of how many times a futures contract has been traded for the day. Volume do not discern between opening transactions and closing transactions, neither does it show the total number of contracts that has been opened and still active in the market. Volume and open interest tell completely different stories about a futures contract and give futures traders a more complete idea on the liquidity of a futures contract.

One more important difference between open interest and volume is that open interest is cumulative while volume isn't. Volume only indicates the number of contracts traded within a single day and then resets the next day while open interest does not reset. The table below shows the change in open interest and volume of an actively traded futures contract on a daily basis.

end of Day... Trades Open Interest Volume
1 John Buys 10 contracts (the Long)
Peter Sells 10 contracts (the Short)
10 (+10) 10
2 John Buys Another 20 contracts (the Long)
Mary Sells 20 contracts (the Short)
30 (+20) 20
2 John offsets 20 contracts 10 (-20) 20

As you can see in the example above, volume merely records the number of contracts that gets transacted daily without regards to whether it is an opening or closing transaction while open interest is a running balance of the number of open contracts in the market that are still due for final settlement.

How Is Open Interest Calculated?

Open interest increases by one whenever a new futures contract is created and reduces by one whenever an existing futures contract is offsetted by a closing transaction.

If you buy (go Long) AAPL's Single Stock Futures with an open interest of 100, open interest for that futures contract increases by one to 101 and when you close that futures position by offsetting it, open interest reduces by one and goes back down to 100.

In fact, open interest isn't unique to futures trading. All derivative instruments such as options have open interest.

Interpreting Open Interest

Traditionally, volume has been used in trend analysis as a form of trend confimation. If futures are also listed for these stocks or indexes, the way the volume and open interest is behaving can offer important and deeper insight into the quality of a trend.

There are four possible combination of volume and open interest; Rising Volume + Rising Open Interest, Declining Volume + Declining Open Interest, Rising Volume + Declining Open Interest, Declining Volume + Rising Open Interest. The table below contains some possible interpretation of these volume and open interest combinations.

Combination Possible Interpretation
Rising Volume + Rising Open Interest Indicates increasing buying interest. This is a strong bullish trend confirmation.
Declining Volume + Declining Open Interest Indicates increasing selling interest where futures contracts are increasingly offsetted. This is a bearish trend confirmation.
Rising Volume + Declining Open Interest Indicates increasing offsetting and usually indicates a resistance level.
Declining Volume + Rising Open Interest Indicates slowly returning buying and usually indicates a support level.

The above interpretations assume normal market trading conditions. There are times when volume and open interest do not necessary reflect the sentiment of the underlying asset. One of such times is during Quadruple Witching when futures arbitrageurs and traders trade more frequently than usual. Open interest also drops as expiration approaches due to futures traders offsetting their positions or rolling their positions forward prior to futures expiration.

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