The open interest for an option is the total number of outstanding or open, not delivered or closed, options or futures contracts that are in effect on any given day, to be delivered at a particular date. It is most often associated with the options and futures markets, where the existing number of contracts will change each day, which is in contrast to the stock market, where the number of outstanding shares for a company will remain constant after each stock issue is completed.
How Open Interest Works
For each buyer of an option or futures contract, there also must be a seller. One buyer and one seller together create a single contract. Therefore, the open interest for an option or futures market is the total number of sellers and buyers as a pair, as opposed to the total of all of them combined.
While it is often confused with its trading volume, the two terms actually refer to very different measures. As an example, during a day where one trader who already owns 10 option contracts decides to sell all 10 option contracts to a different trader that is just entering the market, the contract transfer has no effect on the open interest figure for that option, since no fresh contracts are added to the market.
However, the sale of 10 option contracts by the existing holder to a new option buyer will increase the trading volume for that day by 10.
It is used as a measure of the flow into and out of an option or futures market. An increasing open interest is an indicator of additional money in the market, and a decreasing open interest is an indicator of money leaving that market. Increases in open interest are usually seen as bullish, while decreases in open interest are usually seen as bearish.