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Open interest

 
Investment Dictionary: Open Interest
 

1. The total number of options and/or futures contracts that are not closed or delivered on a particular day.

2. The number of buy market orders before the stock market opens.

Investopedia Says:
1. A common misconception is that open interest is the same thing as volume of options and futures trades. This is not correct as demonstrated in the following example:



On Jan 1, A buys an option, which leaves an open interest and also creates trading volume of 1.
On Jan 2, C and D create trading volume of 5 and there are also 5 more options left open.
On Jan 3, A takes an offsetting position and therefore open interest is reduced by 1, and trading volume is 1.
On Jan 4, E simply replaces C and therefore open interest does not change, trading volume increases by 5.

Related Links:
Applied primarily to the futures market, this indicator confirms trends and reversals. Discovering Open Interest - Part 1
Volume should inform your use of this indicator in confirming trends and reversals. Discovering Open Interest - Part 2
Learn how these two statistics can give you an edge in trading options. Options Trading Volume And Open Interest
Examining this data on currency futures can help you confirm the strength of a trend. Gauging Forex Market Sentiment With Open Interest
Three empirical findings on futures data can help currency traders determine buy and sell points. Using COT Report To Forecast FX Movements
Find out what's happening in a given stock with this service showing Nasdaq market makers' best bid and ask prices. Introduction To Level II Quotes


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Total number of contracts in a commodity or options market that are still open; that is, they have not been exercised, closed out, or allowed to expire. The term also applies to a particular commodity or, in the case of options, to the number of contracts outstanding on a particular underlying security. The level of open interest is reported daily in newspaper commodity and options pages.

 
Wikipedia: Open interest
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Open interest (also known as open contracts or open commitments) denotes the total number of derivative contracts, like futures and options, that are currently active on a specific underlying security. Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.

The change in open interest that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.

Example

For the IBM call option struck at 90 and expiring in January 2007, the total open interest on February 10, 2006 was 10251.

Interpretation

For option traders, open interest is an indication of the intensity of trading in the options of an underlying security. For instance, if open interest increases suddenly from one day to the next, it is likely that new information about the underlying security has been revealed, which may indicate a near-term rise in the underlying security's volatility. In theory there's nothing which can be said on the future direction of the underlying, because there are as many contracts bought as sold.

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day's activity can be drawn. Increasing open interest implies that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue. Declining open interest implies that the market is liquidating, and suggests that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves.

A leveling off of open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market.

Based on studies carried out in international exchanges, it was found that open interest is largest in the near month expiry contracts.[citation needed]

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Copyrights:

Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved.  Read more
Financial & Investment Dictionary. Dictionary of Finance and Investment Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.  Read more
Wikipedia. This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Open interest" Read more

 

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