The derivatives market is quite a different segment from the regular stock market. In the derivative market, the value of a security is derived from an underlying asset. The derivatives contain multiple classifications like forward, futures, options, swaps etc. The open interest concept carries lots of importance and weight in both the futures and options market. By applying the open interest strategy, traders can analyze the derivatives market trend. Here, in this content, you will get basic information regarding What is Open Interest in Derivatives Market?
What is Open Interest in Derivatives Market?
Open interest is almost similar to volume in the regular stock market. At a particular given time, the total open or outstanding contracts known as the open interest. It is calculated only for the futures and options market. When buyers and sellers initiate a new position of one contract, the open interest will be increased by one. Exit one position may decrease the open interest level. Just like volume open interest displays the buyers and sellers’ dominant power in the market along with the trend movement.
Open Interest Calculations
There is no such formula in open interest calculation but the strategy is quite straightforward. In simple words, it is the addition of all opening trade contracts. For example, suppose trader A buys 1 contract and B sells 1 contract in 1st Jan, then the open interest is 1. On the 2nd Jan C buys 5 contracts and D sells 2, now the open interest is (5-2)=3. In these two days, the total open interest is (1+3)=4.
The Importance of Open Interest
As I’ve mentioned that open interest works like volume in the stock market. Less open interest indicates the lower trading volume in the market or in simple words, low closing position. Higher the Open Interest, deeper the market. High volumes with high Open Interest indicates greater hedger and trader participation on stock futures or options counter. Oppositely, high volumes and low Open Interest means a more speculative interest in a counter. As Open Interest is high a trader can gauge whether the short-term trend in a counter is bullish or bearish.
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