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 can only increase because it counts both open and closed positions.
Analysts use open interest to confirm whether a trend is strengthening or weakening. If open interest is increasing, then the trend is strengthening. If open interest is decreasing, then the trend is weakening as traders leave the market. Analysts also use volume to analyze trends; decreasing volume may suggest a weakening trend. It is important to know that an increase in open interest and volume do not suggest a increase in price, but rather a weakening of a trend.
Open interest data is published at the end of the day. Volume changes throughout the day, but is often highest at the opening and closing of the market. Analysts prefer to trade when volume is high because bid-ask spreads are smaller.
Sample Question 1
Sarah is short one corn futures co