Open interest is the total of all outstanding futures contracts that are on a given futures exchange where there is still an obligation of some type to the exchange. The contracts may be long or short, or a combination of the two. The key factor is that the contracts have not undergone liquidation at that point in time and have not been fulfilled by delivery to the investor.
One of the main functions of identifying open interest is that it serves as an indicator of the amount of activity that is taking place with the futures contracts. This is because the amount of open interest involved makes it possible to identify what contracts are currently open. A contract is considered open as long as it has been sold by a market maker to a customer, or vice versa, but the transaction has yet to be reversed. Since open interest is only interested in what commitments are currently open and have not yet been liquidated or settled in some manner, this figure serves as an excellent way of judging the vitality and rate of activity on the exchange.
As futures contracts are liquidated, they are considered closed contracts, and no longer figure into the assessment of open interest. As more contracts are closed with a particular set of futures, the open interest is said to be decreasing or on the wane. This does not necessarily mean that the futures have lost the interest of investors, simply that the futures have entered into a period where new contracts are not materializing. Factors such as the outcome of political elections or even natural disasters may generate a temporary lull in open interest, but the establishment of more futures contracts is likely to appear over time as the market recovers from these extenuating circumstances.
It is not unusual for open interest to be assessed by looking at the total mount of both long and short futures contracts that are open and associated with a given delivery month. As long as the contracts have been entered into during the period and have yet to be liquidated by some sort of offsetting derivative or transaction, they do help to make it possible to gauge the level of interest in the future or options contract. Investors who speculate in futures often pay close attention to the open interest displayed in the current delivery month, and use that information to make purchases and sales of various futures.
