What is Open Interest…….?
Open interest is the total number of open or outstanding (not closed or delivered) options and/or futures contracts that exist on a given day.
One seller and one buyer together create one contract. Therefore, the total open interest in the market for a specified future or option equals the total number of buyers or the total number of sellers, not the total of both added together.
When brand new contracts are created, that do not exist previously, open interest will increase. This means that a new buyer must take a long position and a new seller must take a short position. Together they create 1 new contract in the market
The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.
Why OI is important and useful?
Open interest is an important factor that trader/ Investor should observe when trading in options& Futures.
Open interest statistics are a valuable tool which can be used to predict price trends as well as reversals. The size of the open interest reflects the intensity of the willingness of the participants to hold positions. Whenever prices move, someone wins and someone loses; the zero sum game.
OI helps measure the flow of money into the derivatives market. So, an increase in Open Interest means money is flowing into the market. The opposite means the traders are selling off assets to liquidate. This means, the current market trend is likely to come to an end.
Open interest only calculates open positions. Increasing open interest is typically viewed as a confirming signal for the current trend, since more traders/positions are getting involved. When open interest starts to decline during a trend, a reversal or choppier price period may be near since traders are closing out positions instead of adding fuel to the fire.