What is Open Interest in Futures and Options

Open interest shows you how many outstanding contracts are available in the market. Open interest is usually connected with the Futures and Options markets.

Let’s say Vinay buys 1 lot of NIFTY Futures, and Ravi sells 1 lot. Now here, Open interest is 1, but volume is 2. Imagine another trader now entering the market - Sarath shorts 1 NIFTY lot and thereby creates a new contract. Now the open interest is two, but volume is three.

Open Interest mainly performs two tasks -

Tells you how liquid the stock is, more the Open interest more liquid it is. Open interest hit with price can tell you the behavior of the action.

So if there is an improvement in price with an increase in open interest, it means more people are joining the market with a long view. When the price is moving down along with open interest, it means open interest is reducing.

Short build-up:

The traders are assuming that stock to go down, so they are selling future contracts.

Short covering

It is done by traders when the stock moves up. Traders initially bet that stock will move down when that doesn't happen. They come and close their position.

Long buildup

It is done by traders who anticipate that stock price will move up. They buy a futures contract.

Long unwinding

It is done by traders when a stock is moving up and reaches the trader's target. They close their holding and book profit.