Open Interest is a key marketing term that every trader should know and practice to make better trading sessions. Open interest is often associated with options and futures.
Total number of open derivative contracts not settled for an asset. We need to understand what a contract is, and how it is created. A Futures and Options contract must have a buyer and a seller. One contract is created when buyer and seller have a relationship. One contract is equal to 100 shares of the underlying assets. This contract will remain "open" until it is closed by the other party.
Open Interest is the sum of all contracts bought/sold, not just the sum of them all. When contracts are added, open interest increases and decreases when they are squared off. Open interest increases when money is added to the market. Conversely, decreasing open interest means money is liquidated or outflown into the market.
Open interest is an indicator of market activity. It is also a measure for the flow of money.
Trading has two sides: buying and selling contracts. The Open Interest is the difference between the volume and the open contracts. Volume refers to the total number of trades that were executed in a given period. The change in Open Interest does not convey any direction to the markets, unlike volumes. Open Interest is continuous, cumulative data. Pay attention to situations where Open Interest is indicating abnormally high leverage.
Ram, Rahul, and Ravi all trade the same futures contract. Open interest will increase by one if Ram purchases one contract to trade long. Rahul buys six more contracts to increase open interest to seven. Open interest increases again to 10 if Ravi decides not to sell three contracts and shorts the market.