What Is Open Interest and Why It Matters in Trading

Understanding Open Interest

Open interest is the total number of outstanding derivative contracts—such as futures or options—that have not been settled. Unlike volume, which resets daily, open interest is cumulative, updating when new contracts are opened or old ones are closed. This metric offers deep insight into market participation and liquidity.

How Open Interest Is Calculated

Whenever a buyer and seller create a new contract, open interest increases by one. When they close an existing position, it decreases by one. The figure is reported by exchanges at the end of every trading day, giving traders a transparent snapshot of active commitments.

Open Interest vs. Trading Volume

Volume measures how many contracts changed hands during a session, while open interest shows how many remain active. High volume with rising open interest suggests new money entering the market, reinforcing the prevailing trend. Conversely, high volume with falling open interest can signal profit-taking or trend exhaustion.

Why Open Interest Matters

Monitoring open interest helps traders gauge market sentiment. Rising open interest in conjunction with rising prices typically indicates bullish conviction, whereas climbing open interest during price declines often confirms bearish momentum. Low or declining open interest can warn of weakening trends and potential reversals.

Practical Tips for Traders

Combine open interest with price action, volume, and technical indicators for a holistic view. Look for divergences—such as a new price high that lacks corresponding growth in open interest—to identify false breakouts. Always reference official exchange data to avoid outdated or inaccurate figures.

Key Takeaways

Open interest is a vital, yet often overlooked, tool for futures and options traders. It measures market participation, validates trends, and highlights potential turning points. By integrating open interest into your trading strategy, you gain a clearer understanding of crowd behavior and improve risk management.

FAQs About Open Interest

Is open interest bullish or bearish? The answer depends on price direction. Rising open interest with ascending prices is bullish, while increasing open interest during a downtrend points to bearish pressure.