6.2.3.3. Volume and Open Interest
Open interest is the number of existing contracts at the end of a trading day. Open interest increases when a new position is created; that is when a trader opens a short position or opens a long position. Open interest declines when a trader offsets an existing position. If a trader buys three new contracts, the open interest will increase by three. If another trader shorts six new contracts, the open interest will increase by another six. If the first trader then decides to close all of his positions, open interest will decrease by three. Volume, on the other hand, is the total number of transactions that have occurred. In the scenario described above, the volume would increase by three plus six plus three, or a total increase of 12. Over the course of a day, open interest may increase and decrease as positions are opened and closed, but volume only increases because it counts both open and closed positions.
Sample Question 1
Sarah is short one corn futures contract. On Monday, she offsets her position. John is long one wheat futures contract. On Monday, he also offsets his existing position. Considering these two positions: what has happened to Monday’s volume and open interest (OI)?
A. Volume has increased by two; OI has increased by one.
B. Volume has increased by one; OI has remained unchanged.
C. Volume has increased by two; OI has declined by two.
D. Volume has increased by one; OI has declined by one.
Answer: C. Volume is the number of transactions traded during the day. Sarah has bought a long position to offset her existing short. John has offset his short position by buying a long on the same contract. Together they make an increase in volume of two.
Open interest is the total number of existing contracts at the end of the trading day. Since both Sarah and John offset existing contracts, they both have left the market, and the number of