What is Open interest’
Open interest-the total number of open and outstanding options and/or futures contracts that exist in this time.
Open interest is often associated with futures and options markets, where the number of existing contracts is changing day by day. This is different from stock market where the shares of the company’s shares will remain unchanged after completion of issue shares is.
If the buyer and seller come together and initiate new positions on the same contract, then open interest increases by one contract. If the buyer and seller both outputs on one contract item to trade, then open interest decreases by one contract. If the buyer or the seller reports its current position to a new buyer or seller, then the open interest remains unchanged.
Breaking Down The ‘Open Interest’
Open interest is sometimes confused with trading volume, but the two terms refer to different measures. In the day one trader who already has 10 options contracts sells the 10 option contracts for a new trader to enter the market, translation of contracts, not to create any change in the open interest figure for that particular option. No new options have been added to the market, because one trader passing on his position to another.
Nevertheless, buy 10 options contracts at existing the option holder is the buyer of the option to increase the amount of the auction rate for the day on 10 contracts.
Open interest the number changes only when a new buyer and the seller to enter the market, creating a new contract or when the buyer and seller meet, and they’re both closing positions. For example, if the trader has 10 contracts short-term and long 10 contracts, and these traders then buy and sell 10 contracts with each other, these contracts will be closed and will be deducted from the open interest.
For each seller of a futures or option contract, shall be and the buyer of the contract. One seller and one buyer to create together a trade for a certain number of contracts. Thus, the total amount of open interest in the market for a specific futures or option market is the total number of bought or sold contracts, but not both together.
The importance of Open interest
Open interest is a measure of market activity. Little or no open interest means that there are no open positions, or almost all positions were closed. High open interest means that many contracts still open, meaning that market participants will be closely watching that market.
Open interest is a measure of the flow of funds in the futures or options. The increase in open interest is new or additional money entering the market, while the decline in open interest indicates the flow of money from the market.
Open interest is also used as an indicator of trend strength. With increasing open interest represents additional money and interest appeared on the market, it is usually interpreted as an indication that the current trend in the market is gaining momentum and/or, most likely, will continue. For example, if the trend in the futures or option price (or underlying asset), the increase in open interest, as a rule, prefer a continuation of this trend. The same is true for a downtrend if price decreases and open interest increases, the open interest helps to further reduce prices.
And Vice versa, decreasing open interest reflects the reduction of interest from investors and diminished impulse that indicates that the current trend may soon be exhausted, which leads to a change of trend.