Open Interest is the total number of active options and futures contracts that have not yet been settled against an asset at a given time in the trading arena. It is primarily used as an indicator to identify market positions of securities that have not yet been closed for an unknown reason.
This page covers information on open interest meaning, how it works and its importance. Also, know the difference between open interest and trading volume.
Have you ever wondered why some traders seem to know exactly when to enter or exit a position? I’ll let you in on a little secret—they’re probably watching open interest (OI). As someone who’s been trading for years, I can tell you OI is one of those indicators that doesn’t get enough attention, but can totally transform your trading game.
What is Open Interest (OI) in Stock Market?
Open interest is the total number of derivative contracts, like futures and options, that haven’t been settled yet. It shows how many positions are still “open” in the market. Unlike trading volume that counts all transactions, OI only tracks active, unsettled contracts.
Think of it this way:
- Trading volume = All contracts traded today
- Open interest = All contracts still open at the end of the day
In simpler words OI tells you how many traders are still in the game holding positions they haven’t closed out.
Why OI Matters More Than You Think
When I first started trading I focused only on price movements and volume. Big mistake! Open interest gives you crucial info about market sentiment that price alone can’t tell you.
Here’s why OI matters:
- Market activity gauge – Low OI means few traders are interested in a particular contract, while high OI shows strong market participation
- Money flow indicator – Rising OI = new money entering the market; Falling OI = money leaving the market
- Liquidity insights – Higher OI generally means better liquidity, making it easier to enter/exit positions
- Trend confirmation – OI can help validate if a price trend is likely to continue or reverse
How Open Interest Works (With a Real Example)
Let me break this down with an example that helped me understand OI when I was learning:
Imagine there are three traders—Sharon, Cynthia, and Kurt—trading the same futures contract:
- Sharon buys 1 contract → OI increases by 1
- Cynthia buys 6 contracts → OI increases to 7
- Kurt sells 3 contracts → OI increases to 10
- Sharon sells her 1 contract → OI decreases to 9
- Kurt buys back his 3 contracts → OI decreases to 6
Until Cynthia sells her 6 contracts, OI remains at 6.
Get it? OI increases when new positions open and decreases when positions close. We don’t count transfers of existing contracts between traders.
Open Interest vs. Trading Volume: Don’t Mix These Up!
One of the most common mistakes I see new traders make is confusing OI with trading volume. They’re actually different things:
| Open Interest | Trading Volume |
|---|---|
| Number of unsettled contracts | Number of contracts traded in a period |
| Changes only when positions open or close | Increases with every trade |
| End-of-day measurement | Intraday measurement |
| Shows market participation | Shows trading activity |
For example, if trader A sells 10 option contracts to trader B (who’s new to the market), open interest increases by 10. But if trader A sells those same 10 contracts to trader C (who already has a position), volume increases by 10, but open interest doesn’t change.
How to Read Open Interest in Option Chain
In an option chain, open interest represents the total number of open contracts for each strike price and expiration date. It helps traders assess the level of activity and potential liquidity for different options.
Here’s how I use OI in option chains:
- High call OI typically suggests bullish sentiment (many traders expect the price to rise)
- High put OI often indicates bearish sentiment (traders expect the price to fall)
- Sudden changes in OI at particular strike prices can signal important price levels
But be careful! High call OI doesn’t always mean the market is bullish. Sometimes it indicates hedging activity or other complex strategies.
5 Ways Traders Use OI to Make Better Decisions
After years of trading, I’ve found these strategies for using OI data particularly helpful:
1. Trend Confirmation
When price and OI both increase, it’s a strong signal the current trend will continue. New money is entering, supporting the trend. This is usually the most reliable signal.
2. Spotting Potential Reversals
If OI is decreasing while price is still moving in the trend direction, be cautious! This divergence often precedes a reversal because it shows traders are closing positions rather than opening new ones.
3. Identifying Breakouts
When a security breaks through a key support/resistance level with increasing OI, the breakout is more likely to be genuine and continue in that direction.
4. Reading Market Sentiment
- Price up + OI up = Strong bullish sentiment
- Price down + OI up = Strong bearish sentiment
- Price up + OI down = Weak bullish sentiment (potential reversal)
- Price down + OI down = Weak bearish sentiment (potential reversal)
5. Finding Options with Good Liquidity
Before trading options, I always check the OI. Higher OI typically means better liquidity and tighter bid-ask spreads, which means less slippage and better fills.
Real-Life Example: How I Used OI to Nail a Trade
Let me share a quick story. Last year, I was watching a stock that was consolidating near support. Volume was average, and most indicators were neutral. But I noticed the OI in call options was steadily increasing while put OI remained flat.
This told me that smart money was positioning for an upward move while keeping it quiet. I entered a long position, and three days later, positive news hit and the stock jumped 8%. The increasing call OI had telegraphed the move before it happened!
Common Misconceptions About Open Interest
There are some misunderstandings about OI that can lead to bad trading decisions:
❌ Myth 1: High OI always means a strong market.
✓ Reality: Extremely high OI can actually indicate a market top or bottom is forming.
❌ Myth 2: OI can predict price direction.
✓ Reality: OI confirms trends but doesn’t predict them on its own.
❌ Myth 3: Low OI means you should avoid trading.
✓ Reality: Low OI can sometimes present opportunities if you understand why participation is low.
When Does Open Interest Update?
This is important! Unlike price and volume data which update in real-time, OI is typically calculated at the end of each trading day. Most platforms update OI figures overnight, so you’re looking at previous day’s data.
Some specialized platforms offer intraday OI estimates, but official figures come after market close.
Advanced OI Analysis: For Serious Traders Only
If you’re getting serious about trading (like I did after my first year), consider these advanced techniques:
OI Put/Call Ratio
This measures the ratio of put OI to call OI. Extreme readings can signal potential market reversals:
- Very high put/call ratio = potentially too bearish (contrarian buy signal)
- Very low put/call ratio = potentially too bullish (contrarian sell signal)
OI at Specific Strikes
Large OI concentrations at certain strike prices often act as magnets or resistance for the underlying price, especially near options expiration.
OI Changes After News
How OI changes after major news or earnings can tell you whether smart money believes the move is sustainable.
Who Should Pay Attention to Open Interest?
OI is valuable for:
- Options traders – Essential for understanding liquidity and sentiment
- Futures traders – Critical for trend confirmation
- Swing traders – Helpful for identifying sustainable moves
- Technical analysts – Provides confirmation for chart patterns
Day traders might find less value in OI due to its end-of-day update schedule, but it can still provide context for the trading day.
Tips for Using OI in Your Trading Strategy
After making plenty of mistakes with OI analysis, here’s my advice:
- Combine OI with other indicators – Never use OI alone; pair it with price action, volume, and technical indicators
- Look for divergences – When OI and price move in opposite directions, something important is happening
- Focus on significant changes – Small OI fluctuations don’t matter much; watch for big percentage moves
- Consider time of day – OI is typically higher in the morning and afternoon when there’s more volatility
- Check liquidity – In less liquid securities, OI may not be as reliable an indicator
Tools to Monitor Open Interest
My favorite platforms for tracking OI include:
- Most broker platforms (like TD Ameritrade’s thinkorswim)
- Dedicated options analysis tools
- Market data services
Look for tools that allow you to:
- View OI by strike price and expiration
- Track OI changes over time
- Compare OI across different strike prices
Absolutely! Open interest is one of those indicators that separates casual traders from serious market participants. While it won’t give you magical powers to predict market moves, it provides valuable context that can improve your trading decisions.
I’ve personally found OI analysis most valuable for:
- Confirming whether a trend has staying power
- Identifying potential reversals before they happen
- Finding options contracts with good liquidity
If you’re not already incorporating OI into your analysis, I strongly suggest giving it a try. Start by simply noting whether OI is increasing or decreasing alongside price movements, and you might be surprised at the insights you gain.
Remember: trading success comes from building an edge through multiple complementary tools and indicators. OI is just one piece of the puzzle—but an important one that many traders overlook!
What aspects of open interest do you find most helpful in your trading? I’d love to hear your experiences in the comments!
What happens when OI increases?
When open interest (OI) increases, it usually indicates the entry of new money into the market for any particular instrument like the options contract. It may indicate higher trading activity and interest among investors, potentially signaling a bullish trend. This could also signal heightened belief in the potential of the asset in question.
An increase in OI may come with more contracts being opened, a continuation of the trend (for the asset price), and also a confirmation of the trend strength/bullish market activity. It could suggest stronger buying pressure as well. However, increasing OI during any price decrease may indicate a bearish trend or possible short build-up. This happens when investors sell the asset expecting a price drop. Higher OI usually equates to improved market liquidity, making it easier to exit or enter positions. If the increase in OI comes with a spike in trading volumes, it may indicate higher market volatility as well.
How Does an Open Interest Work?
Open Interest is a term commonly used in Options and Futures trading, where the number of open contracts changes on a daily basis. It refers to the total number of contracts currently open but still need to be settled or closed out. In simple terms, every trade has two sides: a buyer and a seller. Whenever an F&O contract is traded, it is considered open until one of the parties closes their position through offsetting.
Open interest also decreases when buyers and sellers close out more positions than the number of open positions for that day. However, open interest will increase again when investors and traders open more new long positions, or sellers take on new short positions in an amount greater than the number of contracts that were closed that day.
Options Volume and Open Interest | The Basics
FAQ
What if call OI is high?
High call OI indicates significant interest in the asset’s call options, often suggesting bullish sentiment as traders expect the price to rise.
What does “oi” mean in stocks?
Open interest is the total number of futures contracts held by market participants at the end of the trading day. It is used as an indicator to determine market sentiment and the strength behind price trends.
Is high OI always a bullish signal?
A spurt in open interest can be bullish or bearish, depending on accompanying factors: If prices and OI rise together, it often indicates bullish interest with buyers entering. If prices fall while OI rises, it suggests bearish positions are being built.
Is open interest a good indicator?
Yes, an open interest (OI) acts as an indicator for understanding changing price trends. If the OI has increased, it indicates that new money is entering the market. If the OI is decreasing, it indicates money flowing out, i.e., the present price trend is coming to an end.