Open Interest

Posted in Finance, Accounting and Economics Terms, Total Reads: 463
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Definition: Open Interest

Open Interest is a term used in the world of financial derivatives to indicate the number of outstanding contracts (options or futures) that are outstanding (open) at any given point of time.

 

Open Interest is different from trading volume. Trading volume is calculated based on all pairs of long-short transactions happening in the market. On the other hand, open interest only talks about the number of contracts that are outstanding or open at that point of time.

 

Inference:

Usually, higher the open interest, more is the liquidity and tradability of the security. Thus high open interest indirectly translates to high trading volume as it signifies that there are many buyers and sellers who are generally trading with the security in the secondary market.

 

Example:

Day

Trading Activity

Trading Volume

Open Interest

Monday

A buys 10 futures contracts of SCB

B sells 10 futures contracts of SCB

10

10

Tuesday

C buys 2 futures contracts of SCB

D sells 2 futures contracts of SCB

12

12

Wednesday

A sells 1 futures contracts of SCB

D buys 1 futures contracts of SCB

13

11

Thursday

B buys 7 futures contracts of SCB

E sells 7 futures contracts of SCB

20

11

 

(i) On Monday, 10 futures have been sold by B and they have been purchased by B -> number of open futures = 10. Hence Open Interest = 10.

(ii) Similarly, on Tuesday, 2 futures have been sold by D and they have been purchased by C -> number of open futures = 10+2. Hence Open Interest = 12.

(iii) On Wednesday, A offsets his position by 1. Hence Open Interest = 12-1 = 11.

(iv) On Thursday, B buys 7 futures sold by E (new party in the market). B is just substituting E’s role. Hence Open Interest remains at 11.

 

However, Trading Volume comes to 20 by the end of Thursday as every transaction is counted in trading volume (not jut open contracts).

 

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