How to use Open Interest in trading

How to use Open Interest in trading

Open interest, or OI, can be a very important number for futures, options, and other derivative markets, but it can also be important to traders in the traditional stock market. Open interest in derivatives of stocks indicates that there is a deep market for the stock itself, since many of the positions may eventually require the purchase of the stock. Increases and decreases in open interest may help a trader understand if there's significant action in a security's price movements, which can determine liquidity needs as well as whether the price movements are rooted in actual supply and demand characteristics.

Open interest is similar to the notion of market capitalization in the stock market. Market capitalization is a measure of a company’s size, in terms of the value of its total outstanding shares (most investors have probably heard of large-capmid-cap, and small-cap stocks). For example, if company ABC issued 1,000 shares and it is trading at $10/share, then the market capitalization of company ABC is 1,000 x 10 = $10,000.

Open interest, however, is technically more like the number of outstanding shares a company has in the market. This is because open interest is the number of options and futures contracts that are in effect at a given time. If someone wants to buy a futures contract, someone else has to act as the writers and sell it; if someone wants to sell a put or a call, someone else has to buy it. Each of these contracts represent open interest while the contract is in effect.

Instead of a set number of stock certificates issued, like in the traditional stock market, there are an infinite number of options and futures contracts that can be in effect, as long as there are buyers and sellers willing to establish contracts in the marketplace. In fact, the infinite nature of the amount of possible open interest is part of the reason that the derivatives market now has many times the amount of money invested in it than the traditional stock market does.

Click here to view the current news with the use of other Technical Indicators

Open interest gauges market activity and indicates trend strength, but savvy traders will want to use additional tools when determining whether to act on market movements. That’s where Tickeron comes in. Artificial intelligence tools from Tickeron can aid traders with trade ideas, help analyze signals to execute advantageous trades, and assist investors with making rational, emotionless, and effective trading decisions – an antidote to the limitations of technical indicators.

What is a Gann Fan?
What is Ease of Movement?