What is Open Interest in Share Market

In the marketing terminologies, Open Interest is one of the prominent keywords that every ambitious trader must understand and practice for better trading sessions and profits. Open interest is commonly associated with the futures and options.

Total number of outstanding derivative contracts that haven’t been settled for an asset. To know what is open interest, we should know what a contract is and how futures and options contracts are created. In an Futures and Options contract there must be a buyer and seller. The relationship between buyer and seller creates one contract. One contract equals hundred shares of underlying assets. This one contract is “Open” until the counter party closes it.

Open interest is the total number of contracts – bought/sold and not the total of both added together. Open Interest increases when contracts are added and it decreases when contracts are squared off. When the open interest is increasing this means the inflow of money into the market while decreasing open interest is the liquidating or out flow of money into the market.

Open interest is a measure of market activity. In other words, it is a measure of the flow of money.

There are always two sides of trading – buying and selling of contracts. When compared the Open Interest with the volume, Open interest refers to the contracts that are open and live where as volume is that the number of trades executed in a given day. Unlike volumes, the change in Open Interest doesn’t really convey any directional view on the markets also, Open Interest is continuous and cumulative data. Be aware of the situations when Open Interest indicates abnormally high leverage.

Investor B
Investor A Opens Closes
Opens Increases Unchanged
Closes Unchanged Decreases

 

Let’s take an example of Open Interest 

For example, Ram, Rahul and Ravi are trading the same futures contract. If Ram buys one contract to enter a long trade, open interest increases by one. Rahul also goes long and buys six contracts, thereby increasing open interest to seven. If Ravi decides to short the market and sells three contracts, open interest again increases to 10.