Guide to Open Interest
Master the concept of Open Interest (OI), its importance in trend confirmation, and how it differs from volume. Includes FAQs for traders.
If you’ve ever looked at an options chain or a futures terminal, you’ve likely seen the term Open Interest (OI). While many beginner traders focus solely on price and volume, professionals know that Open Interest is the “secret sauce” for understanding market conviction and money flow.
In this guide, we’ll break down exactly what Open Interest is, why it matters, and how you can use it to confirm trends before you place your next trade.
What is Open Interest?
At its core, Open Interest represents the total number of outstanding derivative contracts (such as options or futures) that have not yet been settled or closed.
Think of it this way: for every buyer of a contract, there must be a seller. When these two parties come together to create a new contract, the Open Interest increases by one. It only decreases when both the buyer and the seller “offset” or close their positions.
Open Interest vs. Trading Volume
While volume measures how many contracts changed hands during a specific period—representing the day’s intensity—Open Interest measures the total number of active positions, representing the commitment of market participants. Imagine a dance floor: Volume is the number of times people stepped on and off throughout the night, while Open Interest is the number of people currently dancing.
How to Read Open Interest (The 4 Quadrants)
Traders use the relationship between Price and Open Interest to gauge the strength of a trend.
| Price Movement | Open Interest | Interpretation | Market Sentiment |
|---|---|---|---|
| Rising | Rising | New money entering | Strong Bullish |
| Rising | Falling | Short covering | Weakening Uptrend |
| Falling | Rising | New shorts entering | Strong Bearish |
| Falling | Falling | Long unwinding | Weakening Downtrend |
1. Rising Price + Rising OI
This indicates that buyers are aggressively entering new positions. The trend is healthy and likely to continue because “fresh money” is supporting the move.
2. Falling Price + Rising OI
This is a danger sign for bulls. It means sellers are aggressively opening new short positions. The bearish trend is gaining strength.
Why Should You Care?
- Liquidity Indicator: High OI usually means higher liquidity, making it easier to enter and exit trades without significant “slippage” (price gaps).
- Trend Confirmation: It helps you avoid “fake-outs.” If the price is moving up but OI is falling, the move might be a trap.
- Support & Resistance: Large clusters of OI at specific strike prices (in options) often act as psychological barriers for the price.
Summary
Open Interest is not just a number on a screen; it’s a map of market participation. By combining OI with price action and volume, you can gain a significant edge over traders who only look at the price. For professional-grade analysis, you can track live Open Interest data here.
Frequently Asked Questions (FAQ)
1. Can Open Interest be negative?
No, Open Interest always represents a count of active contracts, so it can only be zero or a positive number.
2. Does high Open Interest mean the price will go up?
Not necessarily. High OI simply means there is a lot of interest and active positions. You must look at the price trend alongside OI to determine if that interest is bullish or bearish.
3. Is Open Interest updated in real-time?
In most markets (like the NSE in India), Open Interest is updated at specific intervals (e.g., every 3 minutes) or at the end of the day, unlike price and volume which update every second.
4. Which is more important: Volume or Open Interest?
Both are vital! Volume tells you about the urgency of today’s traders, while Open Interest tells you about the longevity and conviction of the current trend.
5. What happens to Open Interest on the expiry day?
As contracts expire or are settled, Open Interest for that specific series drops toward zero.
Disclaimer: Trading in derivatives involves significant risk. Always perform your own research and consult with a financial advisor before making any investment decisions.