14 January 2015
Open Interest is the total number of options and futures contracts that are not closed on a particular day.
When a trader buy’s or sell’s an option, the transaction needs to be entered as either an opening or a closing transaction. If he buy’s 5 RELIANCE May 1000 CALL, he is buying the calls to ‘open’, i.e he is opening his position in a futures contract, which causes the Open interest to rise by 5, and then after sometime(within) the month he decides to sell his contract i.e close his position in a particular contract, then he is causing the open interest to go down by 5.
Open interest applies primarily to the futures market, it helps the measure the flow of money into the futures Market. For each seller of a futures contract (eg RELIANCE 1000 CALL) there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. A rise in open interest in a futures contract along with its price indicates bullishness, which means investors are creating long positions and vice versa. The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.
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