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)
|
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