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.
[edit] Example
For the IBM call option struck at 90 and expiring in January 2007, the total open interest on February 10, 2006 was 10251.
[edit] 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]
[edit] External links
- Open Interest
- Stock Option Open Interest Ranking Options Trade Data
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