Futures understanding ‘open interest’. basics of share market us stock market cnn money


Open interest is one of the most confused terms in derivatives . In simple terms, open interest is the number of unsettled contracts. This term should not be confused with ‘volume’ dollar exchange rate to peso today. A Common misconception amoung investors, especially beginners, is that open interest on any day represents the volume of future contracts traded.This needs to be corrected.

With the help of an example, let’s try to understand the term open interest and why it is different from volume . Our friend Mr gbp usd fx. X is a guy who would like to speculate in the futures market. Having made a killing from Nifty futures last month, he starts his game afresh. This week, this is what he has done in the first three days–

So, volume is – 500, number of open contracts – 500.He could buy 500 contracts because there was someone on the other side (say, Mr.

Y) to sell the same. In futures market, every long position (buy position) has to have an equivalent short position (sell position).

Volume for that day is 500, the number of open contracts rises to 1000 usd to inr exchange rate today. Note that we are counting volume from ‘0’ everyday but open positions are counted as a running total. Secondly, when 500 contracts were bought by our friend, 500 contracts were sold by someone (Let’s assume Mr. Y is the seller ).To count the volume, we did not add up 500 buy +500 sell gender quiz. We counted a pair of BUY and SELL as 1. Same logic follows for open interest as well.

However, the number of open position or unsettled contracts may fall to 400 (1000 long -600 short) or remain the same depending upon who purchased the futures from Mr.X.If what Mr binary compound. X sold was purchased by Mr. Y, then the open interest would get reduced to 400. But, if it was purchased by a new entrant (say Mr. C), then the open interest remains at 1000 exchange rate cny to usd. Why? That’s because, when Y purchased, it has the effect of squaring up open positions exchange rate mexican peso to us dollar. So, open interest gets reduced to 400. But when C purchased it, X still has 400 contracts (buy) to settle, Y has 1000 (sell) to settle and new entrant C has 600 (Buy) to settle. The net effect is – open positions remain at 1000.

The rate of purchase or sale of futures or the amount of profit made or loss suffered on the deal is of no importance. What matters is the number of unsettled contracts.

Open interest on the long side or short side? Open interest that’s reported daily on the newspapers and websites is the net open positions on the long side best quotes about love and life. Equivalently, it’s also the number of short positions in the market. So it doesn’t make any difference.

For example- if the media reports that open interest of Wipro futures is 2 lakhs, it means that future contracts equivalent to 2 lakh shares were unsettled joy news. There are 2 lakh shares on the long side and equal number of shares on the short side.

Now I hope, you are clear about the difference between open interest and volume. Open interest is the total of ‘active’ positions in the market. So, when traders buy / sell and settle positions in the market, the open interest will keep changing. It’s basically a running total. Volume is a totally different figure. Each day, volume is counted afresh from ‘0’.

As a single stand alone figure, open interest is of no use. It doesn’t tell you much. The only fact you can guess is that towards the end of the contract cycle, if open interest remains very high, volatility can be expected in the market.

• It’s a weak market if the prices are falling, but volume and open interest are rising hockey blackhawks. New money is entering the market in the form of short sellers.

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