Open Interest in Futures Trading

After learning about hedging, Rajesh was curious about another term he often heard.

“Priya, I keep hearing about something called open interest. What does it actually mean?”

Priya replied, “Open interest is a very important concept. It tells you how many active positions exist in the market.”

What is Open Interest?

Priya explained.

Open interest refers to:

• The total number of active futures contracts
• Those that are currently open and not yet closed

Rajesh asked, “So it shows how many trades are happening?”

Priya corrected him.

“Not exactly. It shows how many positions are still open, not just how many trades happened.”

How Open Interest is Created

Priya explained with simple logic.

Whenever a new trade happens:

• One buyer enters
• One seller enters

If both are new participants:

• Open interest increases

How Open Interest Reduces

Priya continued.

If both participants close their positions:

• Open interest decreases

Rajesh said, “So open interest keeps changing based on activity.”

“Exactly,” Priya replied.

Open Interest vs Volume

Rajesh asked, “Is it the same as volume?”

Priya explained clearly.

• Volume = Number of trades executed during a period
• Open Interest = Number of active contracts at a point in time