An in-depth insight into the concept of open interest
While reading through the matter & on-going activities of the business world, one might have a lot of times come across many jargons. Or let us say terms, that are only relative to that particular industry. To say the least, whether one knows it well or not, one does not dwell in the mere intricacies and nuances of the same. One has to agree fully, that it happens to most of us almost every single day and beyond.
Talking of the phenomenon, that is industry typical words, this on-going article will now steadily focus on something called “Open Interest”.
To know more, “Open Interest” can be summed up as the total number of contracts left outstanding at the end of the day, by the market participants. This term is fluctuating and the reason being it changes every day.
What does one do, in case he/she wants to know the total open interest for any given market?
It is important for you to know, that you cannot determine the open interest market from both sides of the party combined. There is only one side of the contract you can calculate open interest for, i.e. either the buyer or the seller.
If the seller contacts the buyer and successfully manages to get into a contract, you can refer to as formation of a new contract in the open market. Same is the case for dissolution or end of the contract. That is when the buyer and seller decide on exiting a contract, it can be referred to as a deduction of a contract in the open market.
And it is extremely important to note that, if one old buyer sells to a brand new buyer, open interest will remain unchanged in the general terms of things.
So then, what happens when new money flows into the market?
Well, to explain this question correctly, one would say that an indication of an increase in open interest is observed particularly when there is new money flowing into the market.
The market is bound by its nature of circulation. the price trends keep moving upwards, downwards or even sideways. If you notice a decline in open interest, it can be noted that the market is changing and the current price trend may be coming to an end.
In a complete nutshell, open interest provides a master lead indication or a transparent picture of an impending change of trend. The trend that is about to happen in the market.
Can you explain some importance of open interest?
Open interest can derive the present or future market activity. The market is closely monitored when; the numbers of contracts are highly open. On the contrast, if the open interest falls down, there are no new positions open.
It can even be referred to as a trend indicator. If indicates which markets trends are in high demands and which ones are similarly not as effective.
Liquidity i.e. inflow and outflow of money can as well be determined. The new contract would increase the liquidity into the market and declining open interest leads to money flowing out of the market.