Open interest represents the total number of outstanding derivative contracts held by market participants at any given time. This metric provides crucial insights into market sentiment, liquidity conditions, and the flow of capital in perpetual swaps and futures markets 1 2 3 4. When analyzed alongside price movements, open interest serves as a powerful tool for understanding market strength, participant behavior, and potential directional changes in the underlying asset.
What does Open Interest mean?
Open interest is defined as the total number of unsettled futures contracts held by market participants. It is important to understand that open interest is not the sum of both long and short positions, but rather the total number of contracts on one side of the market. This is because for every long position, there must be a corresponding short position. Therefore, open interest reflects the number of active positions, regardless of direction1 2.
The metric is associated with perpetuals, futures, and options markets, as opposed to the spot market. On our platform, the open interest metric reflects the aggregate of perpetuals and futures contracts, given that perpetuals are a subset of futures 5 6. Options are excluded from this calculation, as it is standard practice to separate open interest data for options from that of perpetual and futures contracts.
How is Open Interest used?
Open interest movements provide insight into the risk exposure of the underlying asset and can serve as a form of sentiment analysis when compared with price movements. The metric helps traders and analysts understand:
- Market participation levels: Changes in open interest indicate variations in the number of participants or positions, whether speculative or hedging
- Capital flow direction: Increases suggest capital inflow, while decreases indicate capital outflow
- Market strength assessment: Combined with price trends, open interest reveals the underlying strength or weakness of market movements
The relationship between price and open interest trends provides four distinct market interpretations, as shown in Table 1.
Table 1: Market Strength Based on Price and Open Interest Trends
| Price Trend | Open Interest Trend | Market Interpretation |
|---|---|---|
| Rising | Rising | Strong (bullish confirmation) |
| Rising | Falling | Weakening (possible short covering) |
| Falling | Rising | Strengthening (bearish positioning) |
| Falling | Falling | Weak (bearish confirmation) |
Understanding the Metric
The mechanism governing changes in open interest reflects the way derivative contracts are initiated and closed. Each contract consists of two counterparties: a long position (anticipating a price increase) and a short position (anticipating a price decrease). The net change in open interest depends on the nature of the transaction and can occur in three distinct ways (Table 2)1 3:
- Increase – when both buyer and seller initiate new positions (i.e., a new contract is created), resulting in capital inflow into the market.
- No change – when one participant opens a new position while the other closes an existing one, resulting in no net effect on open interest.
- Decrease – when both participants close existing positions, leading to a reduction in open interest and capital outflow from the market.
Table 2: Impact of Trade Types on Net Change in Open Interest
| Buyer | Seller | Net Change in Open Interest |
|---|---|---|
| Buys new long (open long position) | Sells new short (open short position) | Increases |
| Buys new long (open long position) | Sells old long (close long position) | No change |
| Buys old short (close short position) | Sells new short (open short position) | No change |
| Buys old short (close short position) | Sells old long (close long position) | Decreases |
When new capital enters the market—either through aggressive buying during an uptrend or through the opening of new contracts (i.e., increasing open interest)—this is typically interpreted as bullish behavior, signaling a strong market. Conversely, if prices are rising but open interest is declining, this suggests that capital is exiting the market, primarily through short covering, indicating weakening underlying market strength1 4 .
If new money flows into the market while prices are in a downtrend, this indicates aggressive short selling, strengthening the likelihood that the price downtrend will persist. However, if prices are declining and open interest is also decreasing, this suggests forced liquidation by long holders, reinforcing a bearish interpretation due to simultaneous price and participation decline1 4.
Behind the Numbers
Open interest is measured as the total number of active contracts at the end of each trading day. The calculation methodology involves Open Interest Delta. This is the difference in open interest between two time periods, defined as:
\[\text{IO Delta} \equiv \Delta \text{IO} = \text{IO}_\text{current period} - \text{IO}_\text{previous period}\]The magnitude of the delta reflects market activity or volatility, while its sign indicates the direction of change:
- Positive ($\Delta \text{IO}>0$) – open interest is increasing, meaning new contracts are being opened.
- Negative ($\Delta \text{IO}<0$) – open interest is decreasing, indicating that existing contracts are being closed or settled.
While daily deltas are commonly used, this metric can be computed over different time intervals for broader trend analysis, such as 7-day (weekly), 30-day (monthly), 90-day (quarterly), or 180-day (biannually) deltas.
In the context of options, open interest serves as an indicator of market liquidity, supports a broader array of trading strategies, and is frequently used to produce risk-weighted or exposure-weighted analyses. The separation of options data from perpetual and futures contracts ensures more accurate analysis of each market segment’s characteristics.