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14. What does “open interest” mean?

Basics 3

Open interest is the quantity of derivatives contracts (futures or options) that are collectively held by all the market participants at the end of every day.

14. What does “open interest” mean?
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What is the definition of open interest? 

Open interest is the quantity of derivatives contracts (futures or options) that are collectively held by all the market participants at the end of every day. It is used as an indicator for market sentiment and price drivers.

What are open/closed out positions? 

An open position is when a trader has purchased a financial derivative contract (futures or options) that has a maturity date in the future. For instance, when one buys a dec24 futures EUA contract, they have an open position.

A closed position, on the other hand, is an open position is settled by executing an offsetting trade. For example, if the trader sells their dec24 futures contract, their position is closed.

What does it mean to exercice a position? 

To exercise a position in finance means to utilize the right granted by the financial contract. In other words, if the contract had given you the right to buy one EUA at a certain day and at a certain price, you would exercice your contract if you actually to buy that EUA at that time (at the maturity date of the derivative).

What is a settled contract? 

A settled contract in finance is a completed transaction where the terms of a trade (as delivery of the underlying asset or payment) have been fully executed and finalized.

What is the purpose of the open interest indicator?

Open interest is the total number of open derivative contracts, such as options or futures, that have not been settled.

Basically, it is the sum of all the futures and options that are possessed by market participants at the end of a particlar date. Open interest increases when the number of new long positions opened by investors and traders, or new short positions taken on by sellers, exceeds the number of contracts closed that day.

How does open interest indicate market sentiment? 

Increasing open interest means that new or additional money enters the market, whereas decreasing open interest indicates money exiting the market. It is good when more participants want to be present in a market - their investments show that they trust in its stability (and that they hope to be able to make proceeds from it).

If there is not a lot of open interest, it means that market flows can get lower in the future. If there is limited liquidity, people may get scared that if they want to sell, there is a risk of not finding buyers.

What is the difference between open interest and trading volumes

Open interest (snapshot) is sometimes confused with trading volume (flows), but they measure different things. For instance, if a trader with 10 option contracts sells them to a new trader entering the market, the open interest remains unchanged because no new positions were created or closed, only transferred. However, trading volume increases by 10 due to this transfer.

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