OPEN INTEREST

OPEN INTEREST

•       It is one of the foremost tools for confirming trends and forecasting trend reversals in the futures market.

•       Open interest is defined as the total number of outstanding futures or options contracts that have not been exercised, closed or expired. OI thus is the total number of open contracts of a security in the market. It represents the total number of all long and short contracts of a security in the market on any given day.

•        It applies to the futures and options markets but not to stocks.

     Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the   contract is counted.

•       OI falls and rises only when a new contract is added or deleted,Thus

•       Open interest rises when one  long buyer and one corresponding short seller enter the market, and

•       Open interest falls when one long buyer and one corresponding short seller close their positions,

•       OI provides an indication as regards the liquidity of a particular contract or market. High levels of OI signal a fair amount of liquidity while a low level of OI signifies lack of liquidity in the market.

•        Open interest rising along with prices is a bullish indicator that an uptrend is in progress and is likely to be sustained. It shows that new money is entering the market. - 


    Falling open interest and rising prices is a bearish indicator, suggesting that the rise is being caused by short sellers covering their positions. The upmove is unlikely to be sustained because new buyers are not entering the market.

•       Open interest in a sideways market can suggest a breakout   in either direction.

•       A rise in open interest in a falling market suggests that a downtrend is in place. New money is entering the market through short sellers. - 


    When both open interest and prices are falling, this suggests that the longs are closing out their positions, indicating a trend reversal and an upward movement in price.

•         Static open interest along with rising or falling prices suggests a possible market top or bottom and trend reversal.

•       Volume is often used along with open interest. Volume refers to the number of contracts that have to have been traded within a given session.The higher the volume traded, the more likely a trend will continue. Rising open interest confirms that new money is supporting the prevailing trend.

Using volume and open interest together:

PRICE	OPEN INTEREST	VOLUME	FORECAST
RISING	UP	UP	Bullish (trend confirmation)
RISING	DOWN	DOWN	Bearish (possible trend reversal)
FALLING	UP	UP	Bearish (trend confirmation)
FALLING	DOWN	DOWN	Bullish (possible trend reversal)