Let us try to understand how open interest is different from the volume, with the help of an example. During the first week of the month, Mr. Raju, who speculates in the futures market, bought 100 Nifty futures on Monday. So the number of open contracts is 100. The volume is also 100. He was able to purchase these contracts because there was Mr.Yashwant to sell them. On Tuesday, he bought 100 Nifty futures. The total number of open contracts is now 200, and the volume is 100.

While the open interest is cumulative, the volume is considered only for the day. As there is a corresponding sell for every buy transaction, we have to consider it a pair.

Now let go a little further. On Wednesday, Raju sold 150 Nifty futures. The volume for the day is 150. Now the open interest would depend on who bought the contracts. The open-interest on Nifty futures would have got reduced to 300 if he had sold them to Mr. Yashwant. On the other hand, it would remain at 450 if they were purchased by a new person Mr. Chandru.

The reason is, if Mr. Yashwant had bought them, it would have the effect of squaring off the open position, and the open-interest getting reduced to 300.

The reason is, if Mr. Yashwant had bought them, it would have the effect of squaring off the open position, and the open-interest getting reduced to 300. If Mr.Chandru had purchased them, open-interest would remain at 450 because Mr. Raju and Mr.Chandru together have 450 to settle, and Mr. Yashwant would have 450 to buy. The open position will remain at 450.

In this context, the purchase price of the contracts or profit or loss incurred does not matter. Here we are talking about unsettled contracts.

The uses of open interest

The open interest numbers on its own have no use. We would be able to infer meaningful information if we can correlate the data with volume and price changes. We can expect volatility in the market if the open-interest were to remain high when the contract cycle is about to end.

Some points on open interest

• When the volumes, prices, and open interest rise, prices continue to rise.

• The continuous fall in volume and open-interest, coupled with a price increase, is an indication that the upward trend is about to halt.

• If the volume and open interest are on the rise and prices keep falling, it is an indication that the market is weak.

• Lastly, we can assume that the market is bottoming, when the prices, volume, and open interest all keep going down.

• And finally, when prices, volume, and open interest are all declining, then we can assume that the market has almost bottomed out.