Open interest

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Open interest (also known as open contracts or open commitments) denotes the total number of derivative contracts, such as futures and options, that are currently active on:

  1. a specific underlying security, and
  2. that have identical terms.

That is, the total contracts for a specific strike price and expiration date, that have been traded, but have not yet expired, have not yet been closed through a closing transaction, or have not yet been terminated via early exercise. A closing transaction occurs when a counterparty that is long the contract sells, or, conversely, when a counterparty that is short the contract buys.

Open interest is normally used as an indicator with a security but it can also be used with other instruments such as a currency.

[edit] Example

For the IBM call option struck at 90 and expiring in January 2007, the total open interest on February 10 2006 was 10251.

[edit] Interpretation

Option traders use open interest as an indication of how actively traded the options in an underlying security may be. For instance, if open interest increases suddenly from one day to the next, it's likely that new information about the underlying security has been revealed, which may indicate a near-term rise in the underlier's volatility. Based on studies carried out in international exchanges,it is found that open interest is maximum near month expiry contracts.

[edit] External links

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