Open Interest

Open interest is the total number of outstanding derivative contracts, such as options or futures that have not been settled for an asset. Open interest keeps track of every open position in a particular contract, rather than tracking the total volume traded in it, which may also included netting or closing positions. Thus, open interest can provide a more accurate picture of a contract's liquidity and interest, identifying whether money flows into the contract are increasing or decreasing.

Open interest is the total number of open derivative contracts, such as options or futures that have not been settled. Open interest equals the total number of bought or sold contracts, not the total of both added together. Open interest is commonly associated with the futures and options markets.

Increasing open interest represents new or additional money coming into the market while decreasing open interest indicates money flowing out of the market.

Open interest is the number of options or futures contracts that are held by traders and investors in active positions. These positions have been opened, but have not been closed out, expired, or exercised. Open interest decreases when buyers (or holders) and sellers (or writers) of contracts close out more positions than were opened that day.

To close out a position, a trader must take an offsetting position, or exercise their option. Open interest increases once again when investors and traders open more new long positions or sellers take on new short positions in an amount greater than the number of contracts that were closed that day.

For example, assume that the open interest of the ABC call option is 0. The next day an investor buys 10 options contracts as a new position. Open interest for this particular call option is now 10. The day after, five contracts were closed, 10 were opened, and open interest increased by five to 15.

Technical analysts use open interest, along with other metrics, to gauge the strength of a market trend. Increasing open interest indicates that new traders are entering the market, and may be used to confirm a current market trend. Declining open interest shows that traders are closing their positions, and the current trend may be weakening.

It's important to note that open interest equals the total number of contracts, not the total of each transaction by every buyer and seller. In other words, open interest is the total of all the buys or all of the sells, not both.

The open interest number only changes when a new buyer and seller enter the market, creating a new contract, or when a buyer and seller meet—thereby closing both positions. For example, if one trader has ten contracts short (sale) and another has ten contracts long (purchase), and these traders then buy and sell ten contracts to each other, those contracts are now closed and will be deducted from open interest.

Investopedia