What Is Open Interest?

What Is Open Interest?
Many people tend to get open interest mixed up with volume. Open interest refers to the total number of contracts entered into, but not yet offset, by a transaction or delivery. In other words, these contracts are still outstanding or "open". Open interest that is held by a trader can be referred to as that trader's position. When a new buyer wants to establish a new long position and buys a contract, and the seller on the opposite side is also opening a new short position, the open interest is increased by one contract.

It is important to note that if this new buyer buys from another old buyer who intends to sell, the open interest does not increase because no new contracts have been created. Open interest is reduced when traders offset their positions. If you add up all the long open interest, you will find that the aggregate number is equal to all of the short open interest. This reflects the fact that for every buyer, there is a seller on the opposite side of transaction.

Relationship Between Open Interest and Price Trend
Overall, open interest tends to increase when new money is poured into the market, meaning that speculators are betting more aggressively on the current market direction. Thus, an increase in total open interest is generally supportive of the current trend, and tends to point to a continuation of the trend, unless sentiment changes based on an influx of new information.

Conversely, overall open interest tends to decrease when speculators are pulling money out of the market, showing a change in sentiment, especially if open interest has been rising before.

In a steady uptrend or downtrend, open interest should (ideally) increase. This implies that longs are in control during an uptrend, or shorts are dominating in a downtrend. Decreasing open interest serves as a potential warning sign that the current price trend may be lacking real power, as no significant amount of money has entered the market.

Therefore, as a general rule of thumb, rising open interest should point to a continuation of the current price move, whether in an uptrend or downtrend. Declining or flat open interest signals that the trend is waning and is probably near its end