Open Interest

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Open interest is calculated by summing the number of outstanding derivative contracts, such as futures or options, that have not yet been settled or closed. It is a cumulative count of all open positions in the market. Here's the formula and a step-by-step numerical example to illustrate how open interest is calculated:

Formula for Calculating Open Interest

The formula is straightforward:

$$Open \; Interest=Number \; of \; New \; Contracts−Number \; of \; Closed \; Contracts$$

Open Interest

Steps to Calculate Open Interest

1. Identify New Contracts: Count the number of new contracts opened in a given period.

2. Identify Closed Contracts: Count the number of contracts that were closed in the same period.

3. Calculate Open Interest: Sum the open interest from the previous period with the net change (new contracts minus closed contracts) in the current period.

Numerical Example

Let's consider a simple scenario involving futures contracts for a cryptocurrency, say Bitcoin.

Day 1

• New Contracts Opened: 100

• Closed Contracts: 0

• Open Interest at the End of Day 1: 100 (since there were no previous contracts and 100 new ones were opened)

Day 2

• New Contracts Opened: 50

• Closed Contracts: 20

• Open Interest Calculation:

  • Previous Open Interest (from Day 1) = 100

  • New Contracts = 50

  • Closed Contracts = 20

  • Open Interest at the End of Day 2 = 100 + (50 - 20) = 130

Day 3

• New Contracts Opened: 70

• Closed Contracts: 30

• Open Interest Calculation:

  • Previous Open Interest (from Day 2) = 130

  • New Contracts = 70

  • Closed Contracts = 30

  • Open Interest at the End of Day 3 = 130 + (70 - 30) = 170

Summary

• Day 1 Open Interest: 100

• Day 2 Open Interest: 130

• Day 3 Open Interest: 170

Detailed Example Table

Day	New Contracts	Closed Contracts	Previous Open Interest	Current Open Interest
1	100	0	0	100
2	50	20	100	130
3	70	30	130	170

In this example, the open interest increases as new contracts are added and decreases as contracts are closed. The net effect determines the total open interest at the end of each trading day.

Key Points to Remember

• Open interest increases when new contracts are opened without closing existing ones.

• Open interest decreases when existing contracts are closed without opening new ones.

• Open interest can provide insights into market activity and trader sentiment. High open interest with rising prices typically indicates strong bullish sentiment, while high open interest with falling prices may indicate strong bearish sentiment.

By monitoring open interest, traders and investors can gain a better understanding of market dynamics and potential future movements.

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