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?
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?
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.