Open Interest (OI) in trading refers to the total number of outstanding derivative contracts, such as options or futures, that have not been settled. These are contracts that have been traded but not yet liquidated by an offsetting trade or an exercise or assignment.
Open interest is commonly associated with the futures and options markets. For each buyer of a futures or options contract, there must be a seller. From the time the buyer or seller opens the contract until the counterparty closes it, that contract is considered ‘open’.
Here’s what Open Interest can tell you:
- Liquidity: High open interest means there is more liquidity for the contract, which will make it easier to execute trades at fair prices.
- Market Sentiment: Changes in open interest can indicate potential trends. An increase in open interest could imply that the current trend is gaining momentum, while a decrease might suggest the trend is likely to reverse.
- Volume and Open Interest: If both volume and open interest are increasing, it’s often a sign that new money is coming into the market, suggesting a trend is likely to continue. If volume increases while open interest decreases, it could indicate the trend is nearing its end.
However, while open interest can be a helpful tool, like any other indicator, it should not be used on its own but rather in conjunction with other indicators to make informed trading decisions.