What is Open Interest?

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You might have heard a lot about Open Interest.

But do you know what is it? Why is it so important?

Before understanding it, you need to understand few money fundamentals of trading.

Whenever there is a trade initiated, there has to be a "Seller" and a "Buyer".
When both buyer and seller are agreeing on a price to trade the share/future contract,
then the open interest for the STOCK FUTURE is 1.

For example, if you see open interest for any STOCK FUTURE / INDEX FUTURE = 1,000
That means there are 1,000 contracts in trade

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The change in Open Interest will signify a lot of things. If the open interest starts increasing
and price of the stock increases, that means more people are interested to BUY the
FUTURE CONTRACT, which means LONGs are getting built up.


If the Open Interest starts increasing and price of the stock decreases, that means more people are interested to SELL the FUTURE CONTRACT, which means SHORTs are getting built up.

If the Open Interest starts decreasing and price of the stock decreases, that means people who had bought the contract want to BOOK PROFITs and  they are UNWINDING their LONG positions.


If the Open Interest starts decreasing and price of the stock increases, that means people who had bought sold the contract are now COVERING their SHORT positions.

PS: Open Interest applies only for FUTURE CONTRACTs

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