Contents of this article
- What is open interest?
- How is open interest calculated?
- Case 1. A new buyer meets a new seller
- Case 2. A new buyer meets an existing seller
- Case 3. An existing buyer meets a new seller
- Case 4. An existing buyer meets an existing seller
- What does open interest tell traders?
- Technical Analysis course – CMT Level 1
- The “Stock Trading For A Living” course
What is open interest?
Open interest (OI) is the total number of long/short positions currently outstanding in the market. It is often used in place of volume in the derivatives market (futures and options).
Whenever one trader opens a long position, another trader opens the matching short position, and vice versa. As a result, the total long positions in the market always equal the total short positions, and that number is called open interest.
The open interest of a futures contract is published in market data; in Vietnam, you can easily find it on derivatives price boards.
How is open interest calculated?
Case 1. A new buyer meets a new seller
Let us start from the moment a VN30 index futures contract is first listed, when no trader holds a position yet. Suppose trader A places an order to buy 10 VN30 futures, and trader B places an order to sell 10 VN30 futures that matches A’s buy order. A now has a long position of 10 contracts and B has a short position of 10 contracts. The total on each side of the market is 10 contracts, so open interest is currently 10.
| Trader | Buy | Sell | Position |
| A (new) | +10 | +10 | |
| B (new) | -10 | -10 |
Case 2. A new buyer meets an existing seller
On day 2, a new trader C places an order to buy 6 contracts, matched by trader A’s order to sell 6 contracts. Investors’ positions in the market then change as follows:
| Trader | Buy | Sell | Position |
| A (existing) | +10 | -6 | +4 |
| B (existing) | -10 | -10 | |
| C (new) | +6 | +6 |
As you can see, open interest stays at 10 contracts, because trader C’s new positions are offset by existing investor A partly closing out.
Case 3. An existing buyer meets a new seller
On day 3, trader B places an order to buy 5 contracts, matched by a new trader D who places an order to sell 5 contracts. Because trader B already has a short position of 10 contracts, this 5-contract buy order closes 5 of those earlier shorts, reducing B’s position to -5.
Positions and open interest now change as follows:
| Trader | Buy | Sell | Position |
| A (existing) | +10 | -6 | +4 |
| B (existing) | +5 | -10 | -5 |
| C (existing) | +6 | +6 | |
| D (new) | -5 | -5 |
Case 4. An existing buyer meets an existing seller
By now you can work out the next case yourself: if existing trader B wants to buy 5 contracts and is matched with 5 contracts sold by trader C (also an existing trader), what happens? Open interest falls to 5, because both existing investors are reducing their positions.
| Trader | Buy | Sell | Position |
| A (existing) | +10 | -6 | +4 |
| B (existing) | +5 +5 | -10 | 0 |
| C (existing) | +6 | -5 | +1 |
| D (existing) | | -5 | -5 |
We have now seen how open interest rises and falls when trades take place between new traders, or between new traders and existing traders who already hold positions.
| Buyer | Seller | Change in OI |
| New | New | Increases |
| New | Existing | Unchanged |
| Existing | New | Unchanged |
| Existing | Existing | Decreases |
What does open interest tell traders?
Before making any forecasts, we first need to distinguish two concepts that are often confused: volume and open interest. Volume is the total number of units (shares, contracts) matched in a session or a specific trading period, and it is usually used to measure market liquidity. In the examples above, we can see that every match between a buyer and a seller adds to trading volume, but it may not increase open interest.
Watching changes in both volume and open interest together gives us a more objective and complete view of the current market trend. For example:
| Volume | Open interest (OI) | Interpretation |
| Rising | Rising | The current price trend is confirmed |
| Rising | Falling | Investor interest is waning. |
| Falling | Rising | The market is in an accumulation / distribution phase. |
| Falling | Falling | The current price trend is at risk of reversing. |
Keep in mind that open interest on its own only tells you about traders’ expectations and behaviour in the market; it has no predictive value for the next price trend.
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Other articles in the About the CMT designation section include:
CMT vs CFTe: comparing the two certifications.
What do CMT exam prep materials include?
How to create an account & register for the CMT Level 1 exam.
