Understanding Open Interest in Futures and Options Trading
April 22, 2008
If you're a first time visitor, I encourage you to subscribe to the RSS feed so you don't miss anything. Thanks for visiting!
John Forman - The Essentials of Trading author
One of the less well understood statistics in the basic daily trading data set is open interest. It’s a statistic that is generally included in end-of-day price quotes along with volume, but a lot of traders tend to ignore it, potentially to their detriment.
Open interest is the total number of open contracts in futures and options trading. Recall that in derivatives markets like futures and options there must always be matching longs and shorts. For every mini S&P 500 futures contract that I am long, there is a short out there somewhere, and vice versa.
Let’s look at it in very basic terms with a simple two trader market.
Trader A goes long 10 contracts, with Trader B taking the short side. That increases open interest by 10 contracts.
Trader A later offsets 3 of those longs, and by extenstion Trader B offsets 3 of his shorts, to push the open interest down by 3 contracts to 7.
Open interest, therefore tells us how many active open positions there are in the market at the end of each trading day. It rises and falls on a daily basis as traders continuously enter and exit positions. Generally speaking, it is presented as an aggregate figure for all active contracts, though especially in options you can see the contract-by-contract figures as well.
The value of the open interest data (as Bill Rempel and I were discussing yesterday - Warning Sign: Open Interest Declining) is in its ability to highlight whether traders are building positions (more participation) or taking them off (less participation), especially when combined with volume data and a look at the weekly Commitment of Traders report. The latter shows a breakdown of the positions of the three primary sets of traders.
Here are some other posts which might interest you:
Comments
Got something to say?