Open Interest (OI)

Open interest counts live contracts. When a new buyer and a new seller meet and open positions, open interest rises by one. When an existing holder closes against an existing holder, open interest falls. When a new buyer trades with an old buyer who is selling to exit, open interest is unchanged. It is not volume. Volume counts transfers. Open interest counts how many contracts remain open at the end of the day. In futures it is a direct look at how much positioning is on. In options it is per strike and per expiry, which is where the useful detail lives. A rising price with rising open interest is new positions being added in a rising market. It does not, by itself, prove that the new positions are longs. Every contract has a long and a short. The interpretation adds an assumption about who is the aggressor.

Read open interest with price and with volume. Rising price and rising OI is new participation in the rally, classically long build-up in futures. Rising price and falling OI is shorts closing, a short-covering rally, which can be strong and can also be fragile because it does not require new bulls. Falling price and rising OI is new participation in the decline, classically short build-up. Falling price and falling OI is longs giving up. These four labels are heuristics for futures. They fail when spreads, rolls into the next expiry, and options hedges dominate the change in OI. Around expiry, open interest must be read contract by contract. A fall in the front month that reappears in the next month is a roll, not a liquidation of the whole market.

Use futures open interest to judge whether a move is bringing in new risk or only closing old risk. Prefer new risk in the direction of the trend if you are trading continuation. Treat a short-covering rally, price up and OI down, as a reason to take profits on shorts and to be careful about chasing longs. Use option open interest by strike to see where the large positions sit. Those strikes can act as magnets or as pins into expiry because hedging flows concentrate there. They are not walls. A large open interest is a concentration of exposure, and it can accelerate a move if the holders are forced to adjust.

Calling rising open interest "new longs" as if the shorts did not exist. Also forgetting the roll and announcing a collapse in interest because the front contract expired. And using a one-day OI change that is smaller than the noise of ordinary trading as a story. Look at the change relative to the existing open interest. A rise of a few contracts in a huge market is nothing. The same rise in a thin contract is the market.

Open interest is usually published with a lag, often next day, so it is not an intraday trigger. It does not identify the holder. A commercial hedge, a spread, and a speculative bet look the same in the total. The four price-and-OI labels are widely taught and only moderately reliable, because the aggressor is inferred. In options, open interest does not tell you the sign of the dealer position. You need an assumption about who bought. State the assumption or do not make the trade depend on it.