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Open Interest

Hey Joe! What is Open Interest and how can I use it?

First let's define what it is. Open Interest is the total number of open or outstanding options and/or underlying asset contracts that exist at a given time. Open interest is commonly associated with the futures and options markets, where the number of existing contracts changes from day to day.

Open Interest is a strange statistic. It tells you what is not actively being traded. Open Interest is what positions are being held. When those positions are traded, they move from Open Interest to Volume. An Open Interest of 100 reflects the non-trading position of both buyer and seller. Each one has 100 options or contacts.

Open Interest is not a good way to measure liquidity because for liquidity, the options or contracts need to be traded.

Open interest can be used to indicate at which price there are potential orders that will enter the market. A sudden drop in Open Interest may indicate that traders are losing interest in options or contracts at a particular price - traders may be moving to another price level, or to another date.

A large open interest at a particular option strike price can be an indication of a price that traders will defend at option expiration date especially if there are many more puts then calls or many more calls than puts. Traders will battle to keep prices away from expiring in-the-money at expiration."

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Thursday, 13 June 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.