Open Interest is nothing but numbers of future contracts (or option contracts) that are not closed or delivered (or settled in countries where contracts are settled in cash) on a particular day.
Unlike US, where contracts are delivery-settled, in India contracts are still settled in cash. Open interest is often misunderstood with volume but both are two distinct things.
Let’s see how Open Interest and volume differ-
Volume or Traded Quantity tells us how many contracts were traded on a particular day.
Day | Trading Activity | Open Interest | Volume (for that day) |
1 | A buys 2 Contracts , B sells 2 contracts | 2 | 2 |
2 | C buys 10 contracts, D sells 10 contracts | 12 | 10 |
3 | A sells 1 contract, B buys 1 contract | 11 | 1 |
4 | A sell 1 contracts, C buys 1 contract | 11 | 1 |
5 | B buys 1 contract ,E sells 1 contract | 11 | 1 |
6 | E buys 1 contracts , F sells 1 Contracts | 11 | 1 |
7 | G buys 5 contracts, H sells 5 contracts | 16 | 5 |
When both buyers and sellers are new and when they trade 1 contract, Open Interest increases by 1 contract, when both buyers and sellers are old and trade 5 contracts Open Interest decreases by 5.When a new buyer and an old seller (or an old buyer and a new seller) do the transaction of 10 contracts, open interest remains the same.
Ø Old Buyer + New Seller trades a contract à OI Unchanged
Ø New Buyer + Old Seller trades a contract àOI Unchanged
Ø Old Buyer + Old Seller trades a contract àOI Decreases
Ø New Buyer + New Seller trades a contract à OI Increases
SN | Transaction | Effect on Open interest(OI) |
1 | One new buyer and one new seller of 1 contract | OI increases by 1 |
2 | One new buyer and one old seller ( covering his bought contract ) | OI unchanged |
3 | One new seller and one old buyer( covering his sold contract) | OI unchanged |
4 | Old buyer and old seller covering their positions | OI decreases by 1 |
What indication Open Interest conveys
Open Interest Increase | Long Built Up | Short Built Up |
Short Covering | Long Liquidation |
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