What is: Open Interest

Saurav asked here

Is there any relationship between the performance of a stock with its open interest and volume?

And so I would try to answer this question in as simple terms as I could.

First I would like to tell there is not much inference you can derive from volume. The only thing it helps is if stock moves with good volume it suggests there are lots of activity within the stock.

Now coming to open interest its a large area but I would try to keep it as simple and short as possible. First the Definition from Stock Market Terms

Open Interest

Open interest are open contracts which refers to the total number of contracts, that have not been settled or squared off. For each buyer there must be a seller. So when either of the buyer or seller opens the contract and till he does not square off the contract, it is open and sum total of all such open contracts is called open interest.

From the definition its quite clear that if open interest is 1 implies 1 long or 1 short position and so there is nothing much that can be inferred from this but if you combine open interest with price movement of stock you can get the idea of how the stock can move in future.

Price Move	Open Interest	Inference
Up	Increase	Increase in long positions as many new investors are putting in new money into the market. Truly Bull Pattern
Down	Increase	Shorting is main reason for prices to move down but as there is increase in open interest short squeezes some time soon and bull patter would start. This should be good time to get into the market.
Up	Decrease	Mainly a bearish outlook and people are covering their short positions which is main reason for increase in price.
Down	Decrease	Complete bearish sign as short positions are only built in the market.

I have tried to create a chart for open interest rules but the above Rules. These rules do not take into account the speed at which the open interest change.

Shabbir Bhimani

A trader, investor, consultant and blogger. I mentor Indian retail investors to invest in the right stock at the right price and for the right time.