Open interest refers to the total number of active derivative contracts that have not yet been closed, settled, or expired. It is commonly used in markets for futures and options. Open interest shows how many contracts are currently outstanding in the market.
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Open interest indicates the level of participation in a derivatives market.
When a new buyer and seller create a contract, open interest increases because a new position is opened. When an existing contract is closed or expires, open interest decreases.
Traders often use open interest together with trading volume to understand market activity and the strength of trends. Rising open interest may suggest that new money is entering the market, while declining open interest can indicate that positions are being closed.
Short example:
Suppose traders open 1,000 new futures contracts on a commodity.
These contracts represent agreements between buyers and sellers.
As long as the contracts remain open, the open interest equals 1,000. If later 300 of these contracts are closed or settled, the open interest falls to 700.
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