Understanding Open Interest

Open interest is the total number of futures contracts held by market participants at the end of the trading day. It is used as an indicator to determine market sentiment and the strength behind price trends.

Unlike the total issued shares of a company, which typically remain constant, the number of outstanding futures contracts varies from day to day.

Open interest is calculated by adding all the contracts from opened trades and subtracting the contracts when a trade is closed.

For example, Sharon, Cynthia and Kurt are  trading the same futures contract. If Sharon buys one contract to enter a long trade, open interest increases by one. Cynthia also goes long and buys six contracts, thereby increasing open interest to seven. If Kurt decides to short the market and sells three contracts, open interest again increases to 10.

Open interest would remain at 10 until the traders exit their positions, at which point open interest declines. For example, open interest declines to nine when Sharon sells one contract. When Kurt decides to exit his position, he buys back his three contracts and brings open interest down to six. At this point, until Cynthia decides to sell her six contracts, open interest will remain constant at six.

Open interest and volume are related concepts, one key difference is that volume counts all contracts that have been traded, while open interest is a total of contracts that remain open in the market.

Traders can think of open interest as the cash flowing to the market. As open interest increases, more money is moving into the futures contract and as open interest declines money is moving out of the futures contract.

CME Group products with the largest open interest include Eurodollars, Treasuries and stock index futures.

Open Interest Analysis

Analysts typically use open interest to confirm the strength of a trend. Increasing open interest is typically a confirmation of the trend whereas decreasing open interest can be a signal that the trend is losing strength.

The idea is that traders are supporting the trend by entering the market that increases the open interest. As traders lose faith in the trend they exit the market and open interest declines.

Open interest data is published at the end of each day. Additionally, every Friday afternoon, the CFTC publishes a report called the Commitment of Traders.

This report details open interest from different classes of market participants and whether they are holding a long or short position. This breakdown offers valuable insights into what producers, merchants, processors, users, swap dealers and money managers are doing in the market for a futures contract.

Open interest is one variable that many futures traders use in their analysis of the markets used in conjunction with other analysis to support trade decisions. Large changes in open interest can be an indicator when certain participants are entering or leaving the market and may give clues to market direction.

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