Question

Explain what is meant by open interest, Why does the open interest usually decline during the month preceding the delivery month? On a particular day. there were 2000 trades in a particular futures contract. This means that there were 2000 buyers (going long) and sellers (going short). Of the 2000 buyers, 1400 were closing out positions and were entering into new positions. Of the 2000 sellers. 1200 were closing out positions and 800 were entering into new positions. What is the impact of the day trading on open interest?

Answer 1

Open interest under options/futures means that no of contact outstanding. Contract here means a defined no of stock or we can say a bucket of stock in each contract. Future/option long means (purchase) of the contract and Future/option short means (sale) of the contract. Here if one will long other will short the contract.

Open interest usually decline just before the month preceding to delivery month because many traders closes their positions before it reaches to the month of delivery.

Impact of the open interest:

Existing Long position= 2000-1200 (existing sellers closes their short position so long position will also to be closed)+1400 (New Entrant in Long position)=2,200 contract i.e net increase of 200 contract

Short Position =2000-1400 (existing buyers closes their long position so short position will also to be closed)+ 800 (New Entrant in Short position)=1,400 contract i.e. net decrease of 600 contract.