Open interest

Published on August 5, 2020 by Entrima

The moment a futures contract, an option contract or a swap agreement is entered into by buyer and seller, a position is opened. This way, open interest appears. ‘Open interest’ refers to the total number of outstanding derivatives that have not been settled.

Many analysts are convinced that the open interest provides relevant information, which could be used to indicate market development, especially toward the end of a major move. A rising open interest in futures contracts could indicate that new money is flowing into the market. In turn, this could imply that the current trend will continue. In general, it is said that an increasing open interest confirms the actual trend, whereas a decreasing open interest indicates a weakening of the current price development.

The open interest in different option series, with different strike prices, indicates the price level(s) where the biggest interest from market participants is at. This could serve as a magnet, or be a driver to deviate from in a sudden moment, with significant force, especially toward expiration.

 

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