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Open Interest

Posted in Indicators of technical analysis

Open Interest (abbrev. OI) reflects the number of open contracts on the market. Open Interest of 100,000 simply means this number of contracts to be either terminated or fulfilled.


Please realize that:

  1. If today new 1000 contracts was agreed – i.e. next 1000 buys and sells, Open Interest would rise by 1000 units to 101 thousand.
  2. If the next day 1000 existing Buyers would sell their contracts to new Buyers, Open Interest wouldn't be changed.
  3. If the next day 1000 existing Sellers would buy contracts from 1000 new Sellers, the previous sellers would be  replaced by the new ones and Open Interest remains the same, as well.
  4. If the next day 1000 existing Buyers exit their positions (they Sell) and 1000 existing Sellers close their positions, too (they Buy), Open interest would be lowered by these 1000 contracts.



Open Interest

 

You can see how the daily Volume of July Wheat rises, in the picture above, but the number of Open Interest decreases as the End of trading this market gets near.

 

There is so called First Notice Day in the commodities – when the traders are alerted they control a contract. If they are not really interested in taking delivery of it or delivering it to someone else, they have to close all their positions until the Last Trading Day comes. At LTD the market is traded the last day. Before the First Notice Day comes (or before the Last Trading Day comes, at the very latest), the Open Interest begins to fall rapidly. It means that the Traders who aren't interested in the real possession of the traded commodity, begin to Exit their possitions and cease their contracts. They move to other markets - e.g. next months contracts.

Unlike the Commodities, Shares are traded permanently with no LTD comming, so there is no need to lower the Open Interest number as the time goes by.


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