OPEN INTEREST

INTRODUCTION
Open Interest is the total number of options and/or futures contracts that are not settles on a particular day. In other words, it is the total number of outstanding contracts that are held by market participants at the end of the day. It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery. Open interest measures the flow of money into the futures market. (Contd.)

INTRODUCTION
Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts. For each buyer of a futures contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered 'open'. Thus a seller and a buyer combine to create only one contract.

OPEN INTEREST- Calculation

Each trade completed on the exchange has an impact on the level of open interest for that day. If both parties to the trade are initiating a new position (one new buyer and one new seller), open interest will increase by one contract. If both traders are closing an existing or old position (one old buyer and one old seller) open interest will decline by one contract. If an old trader passes off his position to a new trader (one old buyer sells to one new buyer), the open interest will not change.

OPEN INTEREST- Calculation

OPEN INTERESTTrends & Indications

Trend - Increase in open interest, Increase in price - Increase in open interest, decrease in price - Decrease in open interest, increase in price - Decrease in open interest, decrease in price Indication - New long (buy) positions are being created - New short (sell) positions are being created - Short positions are being squared off - Long positions are being squared off

OPEN INTEREST- An Indicator

An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

OPEN INTEREST- An Indicator

Price Rising

Open Interest Interpretation Rising Market is Strong

Rising
Falling Falling

Falling
Rising Falling

Market is Weakening
Market is Weak Market is Strengthening

OPEN INTEREST-Benefits of Monitoring

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the days activity can be drawn. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend ( up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end.

A leveling off of open interest following a sustained price advance is often an early warning of the end to an uptrend or bull market.