Technical Analysis
OI - What is it?
Open Interest (OI)
Open Interest, commonly referred to as OI, is a crucial concept in futures and options trading. OI represents the total number of open contracts that have not yet been settled or expired. OI is calculated by adding all newly opened contracts and subtracting the contracts that have been closed; remember, there is always one buyer and one seller in a contract.
For example, let's consider three traders: Tùng, Minh, Huy, and Kha. All four traders are interested in a specific futures contract.
On Day 1, Tùng buys 1 contract from Minh, which means Minh sells 1 contract. This increases the open interest by 1, as these are new contracts.
On Day 2, Huy decides to enter the market and sells 3 contracts to Kha. The open interest increases by 3, as these are also new contracts, bringing the total open interest to 4.
On Day 3, Minh decides to close his position by buying 1 contract from Kha. This decreases the open interest by 1, leaving 3 contracts open.
On Day 4, a new investor, Vy, enters the market and sells 3 contracts, while Huy buys 3 contracts. The open interest does not change, as no new contracts are created—this is simply a transfer between Huy and Vy.
On Day 5, all remaining open positions held by Tùng, Kha, and Vy are closed, bringing the open interest to zero.
These transactions can be summarized in the table below:
Day | Action | Change in OI | Total OI |
Day 1 | Tùng buys 1 (L), Minh sells 1 (S) | +1 | 1 |
Day 2 | Huy sells 3 (S), Kha buys 3 (L) | +3 | 4 |
Day 3 | Minh buys 1 (L), Kha sells 1 (S) | -1 | 3 |
Day 4 | Vy sells 3 (S), Huy buys 3 (L) | 0 | 3 |
Day 5 | Vy buys 3 (L), Kha sells 2 (S) & Tùng sells 1 (S) | -3 | 0 |
OI is used as an indicator to determine market sentiment and strength. The number of open contracts changes daily, unlike the number of shares issued by a company in the stock market, which only changes when new shares are issued or shares are bought back.
Open interest and trading volume are related concepts. Volume refers to the number of derivative contracts traded within a specific time frame, usually a day. Each time a contract is bought and sold, the volume increases by 1. If 400 contracts are sold and 400 contracts are bought in one day, the volume is 400, not 800.
Day | Action | Total OI | Volume |
Day 1 | Tùng buys 1 (L), Minh sells 1 (S) | 1 | 1 |
Day 2 | Huy sells 3 (S), Kha buys 3 (L) | 4 | 3 |
Day 3 | Minh buys 1 (L), Kha sells 1 (S) | 3 | 1 |
Day 4 | Vy sells 3 (S), Huy buys 3 (L) | 3 | 3 |
Day 5 | Vy buys 3 (L), Kha sells 2 (S) & Tùng sells 1 (S) | 0 | 3 |
On Day 4, Huy holds 3 short positions and closes them by buying 3 new positions from Vy. This action does not change the open interest, as it is simply a transfer between Huy and Vy without creating new contracts, but it increases the volume by 3, meaning 3 derivative contracts were traded.
During the day, volume can only increase, while open interest can increase or decrease depending on whether positions are opened or closed. It is important to note that today's volume may not relate to tomorrow's volume, and the same applies to open interest.
Traders can view open interest as a measure of money flow into or out of the market. When open interest increases, it indicates that money is flowing into the futures and options markets. Conversely, when open interest decreases, it indicates that money is leaving the market.
Open Interest Analysis (OI)
Analysts often use open interest to determine the strength of a price trend. Increasing open interest usually supports the existing trend, while decreasing open interest may signal a weakening trend. The idea is that when traders enter positions, open interest increases, supporting the trend; when traders lose confidence in the trend and exit the market, open interest decreases.
OI data is published at the end of each trading day. Additionally, every Friday afternoon, the CFTC (Commodity Futures Trading Commission) releases the Commitment of Traders (COT) report. This detailed report on open interest is categorized by different market participants and indicates whether they are holding long or short positions. The report also provides valuable insights into what producers, merchants, processors, users, swap dealers, and money managers are doing in the market for a particular futures contract.
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