What Is Open Interest? What Do Rising and Falling Open Interest Mean?
3 min read · · Korean original
Contents 5
Hello, this is Bitpunk. Today we'll look at what open interest means, how the concept works, and how to use it.
What Is Open Interest?
Open interest refers to all derivative contracts in options or futures that have not yet been settled. Open interest does not count every buy and sell contract. Instead, it counts the number of buy or sell contracts that have not been settled.
By watching open interest rise or fall, investors can tell whether money is still flowing into the futures or options market or flowing out of it.
Understanding Open Interest
To understand open interest, you first need to understand options and futures contracts. If a contract exists, there must be a buyer. Just as you cannot buy something unless someone is selling it, sellers and buyers always exist at the same time.
In this way, a single contract is created through the relationship between a seller and a buyer. This contract stays "open" until one side closes it, and it can be "settled" on a specific delivery date or under certain conditions. A contract that has not been settled is called open interest.
Why Open Interest Matters
Open interest is a measure of market activity. When open interest is low or close to zero, it means almost all positions have been closed. On the other hand, when open interest is high, it means a large number of positions are still open and have not been closed. In other words, many market participants are actively involved in the market right now and are watching it closely.
That's why open interest can be used to measure the flow of money in the futures or options market. Rising open interest means new or additional money is flowing into the market, while falling open interest means money is leaving the market.
The Difference Between Open Interest and Trading Volume
Open interest and trading volume are often confused, but they are clearly different. Suppose someone already holds 10 open contracts and sells all 10 of them to a newcomer to the market. The number of open contracts does not change, but trading volume records 10 contracts traded. It works the same way as taking over existing contracts rather than opening additional ones.
Keep in mind that open interest is a different concept from trading volume, and it can only increase when new buyers and sellers enter the market and open new contracts.
How to Use Open Interest
So how can open interest be used as data? As we saw earlier, rising open interest means money keeps flowing in, and falling open interest means money keeps flowing out.
Traders can use these changes in open interest to gauge the strength of a market trend. If open interest is rising, the current market trend may be more likely to continue. If open interest rises during a price uptrend, the uptrend may continue; if open interest rises during a price downtrend, the downtrend may continue.
| Price | Trading Volume | Open Interest | Market Sentiment |
|---|---|---|---|
| Rising | Increasing | Increasing | Bull market |
| Rising | Decreasing | Decreasing | Possible decline |
| Falling | Increasing | Increasing | Bear market |
| Falling | Decreasing | Decreasing | Possible rebound |
However, when contracts are close to expiry, rollovers or liquidations can cause the market to move sharply in the opposite direction, so be careful. That wraps up our look at open interest.
