What Is Open Interest in Trading?

Definition & Examples of Open Interest

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In trading, open interest is the number of open futures or options contracts for a particular market. It serves as an indication of the strength of the market by showing whether cash is flowing into or out of that particular contract.

Open interest is typically shown along with the current price (bid, ask, and last) and volume when viewing an option or futures quote. Traders need to understand what it means in conjunction with these other indicators in order to properly evaluate a futures or options contract.

What Is Open Interest in Trading?

Open interest indicates how many contracts of a particular future or option are open on the market at the moment. This number changes throughout the day as traders buy and sell contracts.

This is an important number for traders to watch, as it is a sign of whether a particular market is trending or declining.

As open interest increases, this is generally a sign that a trend is rising. A decline, on the other hand, may indicate that the trend is beginning to wane. The larger the changes, the more significant the indicator of a trend's direction.

Open interest is typically displayed along with volume, which shows the total number of contracts traded for the period. Volume is also used as a strong indicator, and to show how actively a market is traded, but it doesn't communicate as much about whether a future or option is trending toward buying or selling.

How Open Interest Is Calculated

Open interest is calculated by adding all of the contracts that are associated with opening trades and subtracting all of the contracts that are associated with closing trades. For example, if three traders (trader A, trader B, and trader C) are all trading the ES futures market, their trades might affect the open interest in the following way:

    • Trader A enters a long trade by buying one contract.
      Open interest increases to 1.
    • Trader B enters a long trade by buying four contracts.
      Open interest increases to 5.
    • Trader A exits their trade by selling one contract.
      Open interest decreases to 4.
    • Trader C enters a short trade by selling four contracts.
      Open interest increases to 8.

Open interest becomes more complicated when you consider that each of the traders is buying/selling from someone else is who selling/buying. Sometimes both parties will be opening trades and increasing open interest; other times one party will be closing a trade and the other opening (no effect on open interest), and other times both parties could be closing trades (dropping open interest). 

Open interest is not the same as volume. With volume, both entries and exits cause the volume to increase, but with open interest, entries cause open interest to increase, while exits cause open interest to decrease.

How to Interpret Open Interest

Open interest is often used as a confirming signal for the current price movement, but on its own, it does not provide any indication of the direction of the price movement. It shows how many contracts are currently in open positions, but it doesn't tell who is long or short. 

Increasing open interest shows that there is the strength behind the current price trend, because the number of contracts in play is increasing, which means activity is increasing and there's excitement about the move. Decreasing open interest shows that there could be a weakening of the current price trend. Traders are closing out their positions more rapidly than new traders are opening them.

For example, increasing open interest along with an increasing price indicates that the upward price movement could continue, but decreasing open interest along with an increasing price indicates that the upward price movement may be about to reverse.

Open interest is also used to determine if a market is likely to be trending or range-bound (choppy). Increasing open interest shows that the rate of new positions is increasing, which indicates that the market is being actively traded and more likely to trend. Decreasing open interest shows that the rate of new positions is decreasing, which indicates that the market may be entering a period of less active trading and is more likely to be range-bound.

Little open interest in an option or futures contract means there isn't an active market for it. Volume also provides this information. That said, even if there is a lot of open interest it doesn't necessarily mean a futures or options contract will do a lot of volume on a particular day. Since open interest reflects open positions, those positions can remain open, with little volume, until eventually, those traders want to close their position.

Key Takeaways

  • Open interest shows how many contracts of a particular future or option are still open on the market.
  • Unlike volume, which just shows total contract movement for the day, open interest can indicate what direction a contract is trending.
  • Increasing open interest is typically viewed as a confirming signal for the current trend since more traders/positions are getting involved.
  • A decline in open interest during a trend may indicate a reversal or choppier price period.

Article Sources

  1. CME Group. "Open Interest." Accessed Aug. 1, 2020.