Open Interest

An open interest is a total number of contracts outstanding (yet to be settled) for an underlying asset. In other words, it is the total number of contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery.

If one buyer and one seller are initiating a new position, open interest will increase by one contract. If both traders are closing an existing or old position, open interest will decline by one contract. If one old trader squares off his initial position to a new trader (one old buyer sells to one new buyer), open interest will not change.

To determine the total open interest, we only need to know the totals from either of the sides of a trade: buyers or sellers, but not the sum of both.

An increase in the open interest indicates that new contracts are being initiated, hence new money is flowing into the market. Correspondingly, a decrease in open interest shows that the market is liquidating.