Open Interest

Key takeaways

• Open interest is the total number of outstanding derivative contracts (futures or options) that have not been settled, exercised, or closed.
• It measures how many active positions exist in a contract, not the number of transactions.
• Increasing open interest generally indicates new money entering a market; decreasing open interest indicates money leaving.
• Open interest is a liquidity indicator—higher open interest usually means tighter bid-ask spreads and easier entry/exit.

Definition

Open interest (OI) is the total number of outstanding futures or options contracts that remain open—i.e., they have been opened but not closed, expired, or exercised. It reflects how many long and short positions remain active in a specific contract.

How open interest works

Rules for changes in open interest:
* OI increases when new positions are opened (a new buyer matched with a new seller).
OI decreases when existing positions are closed (an existing buyer or seller offsets their position).
OI is unchanged when a contract simply transfers from one holder to another (one trader sells to another who opens a new position only if it’s an opening trade; a mere transfer between holders does not change OI).

Practical interpretation:
* Rising OI + rising prices: suggests fresh buying interest supporting the uptrend.
Rising OI + falling prices: suggests fresh selling pressure supporting the downtrend.
Falling OI + rising/falling prices: often indicates liquidation or profit-taking and a potential weakening of the current trend.

Open interest vs. trading volume

• Trading volume counts the number of contracts traded during a period (each trade can involve opening, closing, or transferring positions).
• Open interest counts only active, outstanding contracts at a point in time.
  Example: If Trader A sells 10 contracts to Trader B and neither opens nor closes relative to their prior positions, volume increases by 10 but OI does not change.

Why open interest matters

• Liquidity: Higher OI generally means better liquidity and narrower bid-ask spreads, making it easier to trade large positions.
• Market participation: OI shows the level of trader interest and capital committed to a contract.
• Trend confirmation: Changes in OI, when combined with price movement and volume, can help confirm whether a trend has conviction or is losing support.

Example

Day-by-day illustration (contracts):
* Day 1: OI = 0. Trader A opens by buying 1 contract from Trader B → OI = 1.
Day 2: Trader C opens by buying 5 contracts from Trader D → OI = 6.
Day 3: Trader A closes by selling their 1 contract to Trader D → OI = 5.
* Day 4: Trader E opens by buying 5 contracts from Trader C (who closes) → OI remains 5 (because C closed the 5 and E opened 5).

This shows how opening and closing actions affect OI, while transfers or simultaneous opening/closing can leave OI unchanged.

Interpreting open interest: bullish or bearish?

Open interest itself is neutral. Its informational value comes from how it moves with price:
* Increasing OI with price rise: typically bullish (new buyers supporting the move).
Increasing OI with price fall: typically bearish (new sellers).
Decreasing OI during a trend: may signal that participants are exiting and the trend could be weakening or reversing.

Bottom line

Open interest is a snapshot of outstanding futures and options positions. It is a useful measure of market participation and liquidity, and when combined with price and volume data, it can help assess the strength or weakness of market trends. Open interest does not predict price by itself; it should be used as one element in a broader analysis.