Understanding Open Interest: A Key Metric for Futures Trading

Open Interest and Its Calculation

Before we wrap up this course on ‘Futures Trading’, let’s examine one of the many commonly asked questions—What constitutes Open Interest (OI)? How does it differ from Volumes? How can these data be utilised to benefit traders?

Let’s understand in detail throughout this chapter.

Open Interest represents the amount of contracts currently being traded in the market—a buyer for every seller. Each trade involves two parties, and when one contract is transacted, it is said that the buyer has gone long, whilst the seller went short. Therefore, the Open Interest would be 1 for this particular case.

Let me use an example to help explain OI. Suppose there exist five traders in the market, referred to as Rahul, Priya, Aditya, Sarah, and Karan, who trade NIFTY futures. To comprehend the fluctuations in open interest, we must follow their daily activity with considerable attention. If we do not pay close attention, it can prove quite overwhelming.

Let’s commence.

Day One: Monday

Rahul, Aditya, and Priya’s activity is documented in the table below: Rahul purchased 8 contracts, Aditya 6, and Priya sold all 14. The net result of this transaction equals the same amount on both sides of the market—14 contracts long and 14 short. Thus, the open interest stands at 14.

Monday’s Trading Activity:

Trader Position Contracts Net Position Rahul Long 8+8 Aditya Long 6+6 Priya Short 14-14Total OI14

Day Two: Tuesday

On Tuesday, Priya wanted to shed 10 of the 14 contracts she possessed, so Sarah joined in on the 10 short contracts. There was no creation of new deals; merely a transfer from one person to another. Consequently, the Open Interest (OI) remained at 14. The activity is summarised in the table given below.

Tuesday’s Trading Activity:

Trader Previous Position Action New PositionRahul+8No change+8Aditya+6No change+6Priya-14Closed 10-4Sarah0Took 10 short-10Total OI14

Day Three: Wednesday

Sarah wants to further bolster her short positions by adding 9 more contracts, whilst Rahul and Aditya both choose to expand their long positions. Consequently, Sarah sells 4 contracts to Rahul and 3 to Aditya, creating seven additional new contracts. Priya opts to close out her open positions, transferring two of her short contracts back to Sarah, leaving her with no more contracts. This leaves the table in its current form.

Wednesday’s Trading Activity:

Trader Previous Position Action New Position Rahul+8 Bought 4 more+12 Aditya+6 Bought 3 more+9 Sarah-10 Added 9, took 2 from Priya-21 Priya-4 Closed all 0Total OI21

By Wednesday’s end, the market is composed of twenty-one long and twenty-one short positions, collectively creating an Open Interest (OI) number of twenty-one.

Day Four: Thursday

On Thursday, a trader named Karan arrives at the market with 30 contracts to sell. Sarah liquidates 12 of her contracts, exchanging them for 12 contracts from Karan. Rahul then buys 12 more from him and Aditya takes the last 6. This brings the overall count to 39—18 new ones added to the system.

Thursday’s Trading Activity:

Trader Previous Position Action New Position Rahul+12 Bought 12 more+24 Aditya+9 Bought 6 more+15 Sarah-21 Closed 12-9 Karan0 Sold 30-30 Total OI39

Day Five: Friday

On Friday, Karan opts to settle 24 of the 30 contracts he had earlier sold. He purchases 12 contracts each from Rahul and Aditya. This reduces the overall OI by 24, thus concluding with 15. A final overview is displayed in the table below.

Friday’s Trading Activity:

Trader Previous Position Action New Position Rahul+24 Sold 12+12 Aditya+15 Sold 12+3 Sarah-9 No change-9 Karan-30 Bought back 24-6 Total OI15

At this point, you should have grasped what Open Interest represents. It simply reflects the number of open positions in the market. Note that if you assign a positive sign to long positions and a negative sign to short positions and add them together, the sum will always equal zero. This makes sense when examined more closely; wealth is being transferred between buyers and sellers, not created—like with equities when their prices increase. Thus, derivatives are often referred to as a ‘zero-sum game’.

Current Market Example

Have a look at the following snapshot:

As of 15th March 2025, Open Interest (OI) on Nifty futures is estimated at 3.85 crores, indicating that there exist both long and short Nifty positions amounting to the same figure. An additional 72,340 (1.9%) contracts were added today. OI constitutes a valuable gauge in measuring market liquidity—higher OI translates to higher liquidity, providing an environment conducive for entering or exiting trades with relative ease.

OI and Volume Interpretation

Open interest information tells us how many contracts are active in the market, whereas volume data shows us how many trades have been completed on a given day. As an example, if 550 contracts were bought and 550 were sold over the course of a day, then the total volume for that day would be 550, not 1,100. It proves important to note that these two figures are distinct from one another, although they both reveal something about market activity. The volume counter starts at zero each morning and increases as new transactions take place. Meanwhile, open interest can increase or decrease depending on traders entering and exiting the market.

Take a look at how OI and volume vary on a daily basis. Today’s volume does not necessarily mean the same for tomorrow, whereas open interest may prove to be significant. Individually, these two figures don’t tell us much about the market. However, traders often use them together to make assumptions about market conditions.

Volume and Price Analysis

The following table provides insight into how a trader might view alterations in volume and prices:

Volume-Price Relationship:

Price Movement Volume Market Interpretation Rising Rising Strong bullish sentiment Rising Declining Weakening bullish sentiment Declining Rising Strong bearish sentiment Declining Declining Weakening bearish sentiment

Open Interest and Price Analysis

Unlike volumes, Open Interest (OI) does not necessarily provide any clues about the direction of the markets. What it does tell us constitutes the strength of bearish and bullish stances. The following table shows how price movement and OI changes can be utilised to understand traders’ perspectives:

OI-Price Relationship:

Price Movement OI Change Market Interpretation Rising Rising New long positions being added (bullish) Rising Declining Short covering taking place (weak bullish) Declining Rising New short positions being added (bearish) Declining Declining Long liquidation occurring (weak bearish)

Take heed if the Open Interest shows an unusual rise or decline alongside a surge or drop in prices. It implies that traders have tremendous conviction and capital involved, so even a modest catalyst may cause considerable market movement.

Understanding Open Interest dynamics alongside volume analysis provides traders with valuable insights into market sentiment, liquidity conditions, and potential price movements—essential tools for making informed trading decisions within futures markets.