What is Open Interest (OI) in Stock Market

Open Interest is the total number of active contracts that are not closed or delivered on a particular day. It gives traders an idea of the liquidity and activity level in the futures or options market.

How Open Interest Works

  • When a new contract (either a future or an option) is created (a buyer and a seller agree on a contract), the open interest increases by one.
  • When a contract is closed (either the buyer or the seller decides to exit their position), the open interest decreases by one.

Importance of Open Interest

  1. Liquidity Indicator: Higher open interest indicates higher liquidity, meaning more traders are participating in that particular contract, which can result in tighter bid-ask spreads.
  2. Market Sentiment: Changes in open interest can help gauge market sentiment. Increasing open interest in conjunction with rising prices typically suggests that new money is flowing into the market, indicating bullish sentiment. Conversely, increasing open interest while prices are falling might indicate bearish sentiment.
  3. Strength of Price Movements: Significant price changes with increasing open interest are often considered more meaningful and likely to sustain the trend, whereas price movements with decreasing open interest may suggest that the trend is losing strength.

Examples of Open Interest

  • Futures Market: Suppose there are 100 open contracts for a particular commodity future. If 10 new contracts are bought and sold on the same day, the open interest would increase to 110. If 20 of those contracts are closed out (by either buying back a short position or selling out a long position), the open interest would decrease to 90.
  • Options Market: If there are 200 call options contracts open for a particular stock and 50 new contracts are created while 30 existing contracts are closed, the new open interest would be 220.

Calculating Open Interest

Open Interest is usually provided by exchanges and updated at the end of each trading day. It's calculated as follows: 

Open Interest=Total number of opened contracts−Total number of closed contracts

Interpreting Open Interest in Trading Strategies

  • High Open Interest: Often signifies strong interest in a particular contract and suggests that the contract has high liquidity.
  • Increasing Open Interest: If accompanied by rising prices, it indicates a bullish market. If accompanied by falling prices, it suggests a bearish market.
  • Decreasing Open Interest: Could indicate that the current trend is running out of strength, whether it’s an uptrend or a downtrend.