Open Interest (explanation)

For a newbie, could someone please provide a clear and simple explanation of "open interest" as regards index and commodities futures ???

Of the many glossery's I have reviewed, explanations vary wildly and some seem contradictory ! ( ie. J. Wyckoff vrs Grainguide
.com).

Thanx,
dowfish

 

OI is merely the total number of contracts held overnight. i.e. contracts not closed(liquidated) during the trading day. Obviously for every open long there is a corresponding open short.

 

According to CBOT Glossary of terms :

Open Interest -

The total number of futures or options contracts of a given commodity that have not yet been offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted.


Every contract has a buyer and a seller and when combined they create only one contract. So if a large number of buyers step in OP increases or if a big number of new sellers come into, OP increases as well. OP decreases when positions are liquidated, offset or expired.

Hope this help.

 

I think Pabst's explanation was easier for a newbie to understand.

 

I've just added a note to the CBOT concept.

 

Pabst and Hawker,

Thank you so much for your help !

I begin to see the light ( reference COT report 8/26/03 $5 mini-dow ):

Fund shorts + spreads + Comm shorts + NRP shorts = OI 47,176
Fund longs + spreads + Comm longs + NRP longs = OI 47,176

Do specialists enter market to balance shorts vrs longs to balance equation ?
Many times I have observed funds way short and comm way long.

I am sure this info will be of major benefit to newbies, at least it has taken me considerable time to understand this.

Thanx again,
dowfish

 

Dowfish,
There's not such a thing as a Specialist or a market maker in the futures arena. Futures is a "zero summ game". You only have traders .The commercial traders ( hedgers) the big speculators ( institutions) and the small speculators ( i.e . we , the retail traders). So you step in one side : Long or Short and the transaction is made against another trader ( not a specialist ) in the opposite side of yours.

 

Hawker,

I think ( ? ) I've got it.

At the end of the trading day if ( for example ) short orders ( even if bid at market ) out number longs, then short positions will not get filled (covered, offset, ? ).

Appreciate your patience !
Thank you,
dowfish

 

Well those contracts also count but is not exactly like that, because in that way we would talk about "the remaining contracts or the leftover contracts" which is not true. We've to talk about the outstanding contracts or the held contracts. However if the positions are not liquidated as you noted in your example, they will be part of the open interest for the next trading day , of course.

Let me give you an example :
Lets suppose you decide to buy a contract in Gold, because after your research you think Gold is going higher. So, the only way that you can go Long in gold is because there's another guy out there that after his research he thinks Gold is gonna be down and he decides to sell.
How you can see , we're talking about two sides. You=Long side and the Other Guy=Sell Side ( or short) , but as you realized there's only ONE contract. So you buy the contract and hold it . In that case the open Interest is = one because the contract is open and your money is in the market. Now assume you're a big hedger who buy and hold hundreds of contracts, all those contracts are outstanding contracts (money in the market) that increases open interest . The same is true if you Sell Short a contract. If you step in the bear side the contract will be open until you cover it back. That's the reason why we only have to count the open contracts in one side of the market to find out what the open interest would be. Open interest = Open Contract

 

Hawker,

"leftover" contracts" are up for next trading day to become part of open interest.

Thank you ! Have learned a lot.

Will start a new thread as to what happens to "leftover" contracts when contracts expire ( don't have room in my front yard for 5,000 bushels of oats).

You have been very patient with a newbie and I certaintly appreciate all your help !!

Thanx again,
dowfish