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:
- a specific underlying security, and
- 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, been closed through a closing transaction, or 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.
[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.
