Open Interest

By Carl Loffmark

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What is open interest? 

Open interest refers to the number of contracts or commitments that have not been settled and remain open at the end of a trading day. For each contract there must be a one buyer and one seller, so when a contract is opened (created) between a buyer and seller and not closed out by the end of the trading day, the open interest rises by one. The contract is open until one party closes it, at which point the open interest drops by one. If the open interest rises, then there are new contracts being entered which are not closed out by the end of the trading day. Conversely, when the open interest falls, contracts have been closed by the end of the trading day. 

Open Interest vs Volume 

Open interest differs from volume in that it represents commitments remaining after the close of each day, whereby volume represent the number of times a contract changes hands. Open interest can be unchanged at the end of a busy trading day if all positions entered that day are closed out the same day, while volume for the day may be high.

Interpreting open interest and price trends

Rising open interest represents money moving into an asset (futures contract), whereas falling open interest represents money moving out of an asset. Open interest can be used in conjunction with price direction to assess the strength of a price trend. Rising open interest and rising price indicate traders are supporting the trend by entering the market. Money moving out of an asset combined with falling price can be viewed as a sign that traders are losing faith in a market.

How to profit

There are many possible variations and combinations of open interest and price patterns, readers are encouraged to refer to our Commodity Futures Weekly Newsletter for strategies on how to profit from interpreting open interest.

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