How Open Interest Changes as Futures Contracts Are Traded
Summary
The document explains how futures open interest relates to trading volume. Open interest counts outstanding contracts, with each long matched by a short. Trading volume counts contracts traded during a period, so a trade does not necessarily create or remove open interest: it depends on whether the parties are opening or closing positions.
When a buyer and seller exchange an existing position, open interest stays the same. When both sides establish new positions, it rises; when a position is closed against an existing opposite position, it falls. The explanation also notes that open interest starts at zero for a newly listed contract and returns to zero by expiration. It offers an intuitive accounting framework, but gives no numerical examples or empirical analysis; the brief follow-up says equality between open interest and volume is rare and usually coincidental.
Key ideas
- Open interest measures outstanding matched long and short futures positions.
- Trading volume counts contracts traded and does not by itself reveal whether positions were opened or closed.
- Trades between existing position holders leave open interest unchanged.
- Open interest rises when both sides establish new positions and falls when both sides close positions.
- A contract's open interest returns to zero by expiration.
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Full text
# When would open interest equal trading volume? # When would open interest equal trading volume? I know the difference between open interest and trading volume. Open interest is the number of contracts, long or short, outstanding. Trading volume is the number of contracts traded in a day. However, I am struggling to understand this concept intuitively. When would open interest equal trading volume and when would it differ? ## Answer by Alex C (score 10, accepted) https://quant.stackexchange.com/a/48712 Futures are in "zero net supply", or "for every long there is a short", which means that at any time there are investors who are long a certain number of contracts and other investors who are short an (exactly matching!) number of contracts. This number is called the Open Interest. It starts at zero when the exchange introduces a new contract (like Sep 2019 Gold a few years ago), increases over time, and then goes back to zero by the expiration date (September 2019), after which the contract no longer exists. When you buy a contract, you can buy an "already existing" contract from an investor who is long (in which case there is one trade and no change in OI), or you might buy it from a "writer" who does not have a contract but creates one by selling short to you. In the second case there is one trade and also an increase in Open Interest by 1 unit. Of course you don't know, when you are buying, who is on the other side and whether they have a position or not, so you can't tell the difference. But the OI can be computed by the exchange based on its information from all the clearing firms (one of whom, of course holds you account). OI decreases when someone who is long sells to someone who is already short. In this case both parties have terminated their positions. OI also decreases at expiration when someone who is short delivers the underlying to someone who is long, closing out their obligations to each other. ## Answer by ThatDataGuy (score 0) https://quant.stackexchange.com/a/53413 ``` When would open interest equal trading volume ``` Only very rarely, and purely by chance ``` and when would it differ? ``` almost all of the time See Alex C's great answer for details.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.