Knowledge of Open Interest

Published by Sharekhan Education | October 4, 2022

By Anand Sharma | Sharekhan Education 

Knowledge of Open Interest

Open Interest (OI) is the “Interest” that is “Open”, as its name implies. At the end of the trading day, open interest is the total number of futures contracts held by market participants. When a transaction is closed, open interest is calculated by adding all the contracts from the opened trades and subtracting the contracts. Suppose the seller sells one contract to the buyer. The buyer is considered to be long on the contract, while the seller is said to be short on the same contract. One long open interest and one short open interest, resulting in one open interest.

Analysis of Open Interest

Open interest is generally used by analysts to confirm the strength of a trend. When open interest increases, the trend strengthens; when it declines, the trend weakens.

Assessment of whether the market is bullish or bearish based on open interest

Price	Open Interest	Trend Dynamic	Strategy Action
Rising	Rising	Uptrend is strengthening	Buying in Demand Zone
Falling	Rising	Downtrend is strengthening	Shorting in Supply Zone
Rising	Falling	Uptrend is weakening	Shorting in Supply level above current market price
Falling	Falling	Downtrend is weakening	Buying in Demand level below current market price.

Interpretation of rising open interest in relation to pricing;

If both “price” and “open interest” are rising, it indicates that every new contract added is controlled by bulls, which is why price is rising with each new contract addition. This shows that as prices rise, skilled traders add more to their long positions, strengthening the uptrend.

If the price falls while open interest rises, it indicates that bears control each new contract added, which explains why the price falls with each new contract addition. This shows that as prices fall, skilled traders increase their short positions, so strengthening the downturn.

Interpretation of falling open interest in relation to pricing;

If open interest is declining while prices are rising, it suggests that as prices rise, positions are being squared off. This shows that skilled traders are not adding positions as prices climb, and hence the uptrend is weakening.

If open interest falls while prices fall, it suggests that positions are being squared off as prices fall. This indicates that when prices fall, professional traders are not adding positions, and hence the downtrend is weakening.

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