Open Interest Definition

The number of futures or options contracts of a given commodity that are currently being traded. These contracts have not yet been offset by an opposite transaction or filled by delivery of the commodity. Open interest increases when a new buyer purchases a contract from a new seller. It decreases when an existing owner of a futures contract sells to an existing short (a trader who has sold something that he or she doesn’t own). However, open interest is unaffected if a new buyer purchases from an existing long or a new seller sells to an existing short. Rising open interest indicates increased interest in the market because there are more contracts beings traded. When contracts are new, their open interest is limited, making them illiquid, which lessens their attractiveness to trade. It will take months, if not several years, to build up their open interest, and thus their liquidity. Liquidity is impaired when open interest levels are approximately below 5,000 contracts or the average daily trading volume is below approximately 1,000 contracts.