Open Interest
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Open interest (OI) denotes the number of options or futures that are opened and not closed out yet.
There are separate OI for options and for futures.
When options are bought or sold TO OPEN, it increases the OI.
When options are bought or sold TO CLOSE, it reduces the OI.
For example,
If an option buyer goes to the market and buys 200 call options, the volume for the day is 200 and the Open Interest becomes 200 as well.
If in the same day, a new seller goes to the market and sells 150 put options, the total volume for the day is 350 and the Open Interest becomes 350.
If before the end of the day, both the buyer (sell to close) and the seller (buy to close), the volume added will be 350 from the buyer (+200) and seller (+150). Total volume becomes 400+350 = 750.
Since there are no longer any opened and not yet closed positions, Open Interest therefore becomes 0 as far as these two market participants are concerned.
OI helps to give a clue on what orders traders are initiating, and the general activity of the futures/ options market.
But using Open Interest alone is not enough. It is also necessary to take a detailed look into the volume of the exact orders to have a better sensing of the sentiment of the market.
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