What is Open Interest?

Apurva Sheth
Technical analysis revolves primarily around studying the price action of financial securities listed on the exchanges. You can study price action by tracking daily trading data including open, high, low, close (OHLC), and volume.

These five data points are considered the most important for trading and analysis. All other forms of data - such as moving averages, momentum indicators (e.g. RSI, MACD), and breadth indicators (e.g. advance-decline ratio) - are secondary. After all, you can only calculate the secondary data if you have the primary data.

Market technicians consider OHLC and volumes to be the most important data for analysis. However, there is another data point which is equally useful - open interest.

Open interest is the total number of open futures or options contracts held by market participants at any given point. It is the net number of long or short positions. This primary data point is available only in the futures and options market.

Open interest varies on a day-to-day basis. It is unlike the cash or spot market where the total number of outstanding shares remains the same.

People often confuse open interest with volumes. But they are very different. Volume is the amount of contracts being traded on a given day. Open interest is the number of open contracts. Volume measures the level of trading activity in a security. Open interest measures the fresh flow of money into the security.
Let's better understand both concepts with the help of an example.

Day Trading Activity Open Interest Volume
Sep 1 A buys 1 contract and B sells 1 contract 1 1
Sep 2 C buys 5 contracts and D sells 5 contracts 6 5
Sep 3 A sells 1 contract and D buys 1 contract 5 1
Sep 4 E buys 5 contracts from C who sells 5 contracts 5 5

  • On September 1, A buys a future or option contract from B, which generates an open interest of 1 and also creates a trading volume of 1.
  • On September 2, C buys fresh 5 contracts from D, which creates a trading volume of 5 and the total open interest stands at 6 as 5 more contracts are added to the 1 contract A opened the day before.
  • On September 3, A squares off his position by selling the contract to D, which reduces open interest by 1 contract to 5 and puts the trading volume for the day at 1.
  • On September 4, E buys out C, so open interest remains unchanged at 5 while the trading volume for the day is also 5.
I hope that helps. Price changes along with changes in open interest are often used to confirm trends and reversals for futures and options contracts.

As you can see in the example, open interest can stay the same despite a rise in volumes. This means that, despite rising volumes, there isn't any fresh participation in the security. It is just a change of hands.

That's why futures and options traders prefer to look at open interest data along with price action to take cues of the trend. Open interest can help cash or spot market traders as well, at least for stocks available in both the cash and futures segment.

At Swing Trader, we look at the open interest data generated from the futures and options market before we recommend a trade. Next time, I will show you how to analyse open interest data. Stay tuned...

Do you track open interest data in the futures and options market? Share your views in the Club or share your comments here.

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7 Responses to "What is Open Interest?"
abyss76
15 Feb, 2019
clearly explained. i generally used to consider the strike price with the highest openinterest as the threshold but these days the bigger market players are continuously shifting the strike price with highest open interest. after all if we develop a strategy they will try in every best wasy to thwart it. :-)Like 
Ajay
01 Dec, 2018
Without this option chain cannot be analysed.Like 
s.r. prusty
02 Dec, 2017
Does it mean that all "buy"s create an open position ?Like 
SANTHOSH KUMAR
18 Sep, 2016
Very well explained. A small thing to add on it... An increase in open interest doesnt mean that the prices are going to go up, as an increase in sell contracts can also increase the open interest and thus price action of the scrip along with open interest is the way to analyse the future movement of the scrip. Also at times the bulk volume traders or fund houses creates short position which might increase the open interest at the same they buy equal positons in cash or hedge the same which ultimately not understood properly can invite as loss of trade. Only experts with good knowledge of f&o needs to be followed if one wants to make profit out of it. Like 
ARUP
14 Sep, 2016
Well explained...will await real example of Swing trader-trades. Like (3)
DK Purwar
14 Sep, 2016
But it is not clear from the above explanation whether open interest are on sell side or buy sideLike (2)
Dr Darshan Shukla
14 Sep, 2016
Dear Apurva, Greetings You are saying very true for OI but OI is not only for F & O, I'm tracking in cash since 8 yrs, NSE gives it in there EoD (End of Day) data sheet (Bhavcopy) where it give as "Total Deliverble Quantity" It's very very Useful for seasoal investor, You can track cash & FO simultaneously for better prediction on TREND... ?? ? Like (1)
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