What is Open Interest?
Open Interest (OI) represents the total number of outstanding derivative contracts (futures or options) that have not been settled. Unlike trading volume, which tallies every trade made during the day, OI only increases when new contracts are created and decreases when contracts are closed.
Analyzing OI alongside price action provides deep insights into the strength and sustainability of a market trend. It tells you whether new money is entering the market or old money is exiting.
The Four Phases of Open Interest
Traders categorize OI and price relationships into four primary scenarios:
- Long Buildup: Price increases + OI increases. Indicates strong bullish sentiment as new buyers enter.
- Short Buildup: Price decreases + OI increases. Indicates strong bearish sentiment as new short sellers enter.
- Long Unwinding: Price decreases + OI decreases. Indicates bulls are closing their positions (profit taking or cutting losses).
- Short Covering: Price increases + OI decreases. Indicates bears are buying back to close their short positions.
Frequently Asked Questions
How is Open Interest different from Volume?
Volume counts the number of contracts traded during a specific period. Open Interest counts the total number of active, open contracts that currently exist. A contract traded between two existing participants adds to volume but does not change OI.
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