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Understanding Open Interest in Futures and Options Trading

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 extension 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.

By John

Author of The Essentials of Trading

3 replies on “Understanding Open Interest in Futures and Options Trading”

When open interest declines and at the same time, the transaction volume reduces, this shows that traders start to stop buying stocks. This is usually due to the bad sentiments cycling around the traders. Some bad news make them take times off from the market.

John Forman

I think you did a lousy job of explaining what an open interest means.
If I were you, I would explain that open interest is comparable to common stock float . While common stocks has fixed authorized number of shares that cannot be changed unless authorized to split or reverse.. Stock options has nothing to start with but open interest that grows or shrink depending on the outstanding number of options that are bought to open and sold to close or whatever like straddles, and those crazy option strategies used by traders. Why open interest is important to know is to give a trader an idea of the popularity of that specific option in specific price and date of exercise. Volume is the same definition between common stocks and options except that options is every hundred shares per volume. I often find it begging to improve explanations of stock options , people sems to be so glib about explaining it to readers as if they float over their heads with assumptions that they understand what they are saying or hearing.

Gumby – Aside from your comparisson of open interest to stock float (which I think is quite shaky since the latter is mostly fixed for any given period and the former is in constant fluxuation) , I see no appreciable difference beween what you’ve described in terms of open interest and what I have, except that you are less detailed in yours. So if I’ve done a lousy job, you’ve done a worse one.

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