Terms & Definitions
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      What is 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.

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

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

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

      Here is a simple example:

      Day 1: Starting Open Interest = 0

      • Trader A buys 1 wheat contract from Trader B (new position)
      • Open Interest increases to 1
      • (Both traders have an open position - one long, one short)

      Day 2: Starting Open Interest = 1

      • Trader C buys 1 wheat contract from Trader D (new position)
      • Open Interest increases to 2
      • (Now four traders each have an open position)

      Day 3: Starting Open Interest = 2

      • Trader B buys 1 contract from Trader C (transfer of existing position)
      • Open Interest stays at 2
      • (Trader C closes their position, Trader B switches from short to long)

      Day 4: Starting Open Interest = 2

      • Trader A sells their contract to Trader D (closing a position)
      • Open Interest decreases to 1
      • (Trader A and D close out their opposing positions)

      Key Points:

      1. Open Interest only increases when new positions are created
      2. When existing positions are transferred, open interest remains unchanged
      3. When positions are closed out, open interest decreases
      4. Open interest reflects the total number of outstanding contracts
      5. For every long position, there must be a corresponding short position

      This is why open interest is often used as a measure of market participation and liquidity in futures markets.