Open interest Totally Explained

Everything about Open Interest totally explained

Open interest (also known as open contracts or open commitments) denotes the total number of derivative contracts, like futures and options, that are currently active on:# A specific underlying security, and

That have identical terms.

Namely, the total contracts for a specific strike price and expiration date, that have been traded, but have not yet expired, have not yet been closed through a closing transaction, or have not yet been terminated via early exercise. A closing transaction occurs when a counterparty that longs the contract sells, or, conversely, when a counterparty that shorts the contract buys.
Open interest normally serves as an indicator about a security but it can also be used with other instruments like a currency.

Example

For the IBM call option struck at 90 and expiring in January 2007, the total open interest on February 10 2006 was 10251.

Interpretation

For option traders, open interest is an indication of how intense trading the options in an underlying security may be. For instance, if open interest increases suddenly from one day to the next, it's likely that new information about the underlying security has been revealed, which may indicate a near-term rise in the underlying security's volatility. In theory there's nothing which can be said on the future direction of the underlying, because there are as many contracts bought as sold.
Based on studies carried out in international exchanges, it's found that open interest is maximal near month expiry contracts.

Further Information

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