What is open interest?

 you’ve recently started exploring futures and options trading, you’ve probably come across the term Open Interest (OI). At first, it may sound complicated, something only professional traders understand. But once you break it down, open interest is actually very simple, powerful concept that can help you make smarter trading decisions. Think of it like checking the number of people currently “playing the game” in a particular contact. The more players, the more active and energetic the game becomes. 
In this blog, let’s decode open interest in a simple way.

Understanding open interest (OI) in simple words

Open interest represents the total number of active futures or options contracts that are currently open and not yet settled. These contracts are still alive, neither squared off nor expired.

A simple way to imagine it is: 
If two traders come together and create a new contract, one takes the buy side and the other sell side, open interest increases by one. If either side closes the position, open interest decreases. 
So, instead of thinking of buy and sell quantities separately, OI simply tells you how many contracts are still “open” in the market right now.

How open interest works 

Let’s take an easy example.

Suppose you and your friend both decide to trade NIFTY futures. 
You buy 1 lot, and your friend sells 1 lot.

This creates one new contract, so open interest = 1.

Later, if you decide to exit your position by selling to another trader, and that trader is opening a fresh position, OI stays the same. But if you sell it back to your original friend (who is closing his position), the contract gets closed, reducing open interest. 
This is why open interest is not about “how many people are buying or selling today”, it’s about how many contracts are still existing in the market.

Why open interest matters to traders

Open interest is like a window into trader participation. A contract with high open interest usually signals:

• More liquidity

• Better price discovery

• Tighter bid-ask spreads

• Higher confidence among participation groups

When open interest is high, you’re participating in an active, lively market. When it’s low, it’s like entering an empty restaurant, you’re not sure if you’ll get the best experience.

Open interest vs Volume 

People often confuse OI with volume, but they’re very different. Volumes shows how many contracts were traded in a day, like how many sales happened today. Open interest, on the other hand, shows how many contracts are still outstanding.  
So, even if 1,00,000 contracts are traded today (volume), the open interest could be just 10,000 because most trades might’ve been closing out existing positions.

When open interest rises: What it really means

When OI goes up, it generally signals fresh money entering the market. More traders are opening new positions. This often reflects stronger conviction and momentum.

For example: 
If price increases and OI also increases, traders believe the uptrend has strength. This means new buyers are coming in and they’re confident. Similarly, if prices fall and OI rises, it indicates strong bearish conviction.

When open interest falls: what it tells you

When OI decreases, it means traders are closing positions, either booking profit or exiting due to uncertainty. This reduction in participation often reflects:

• Trend exhaustion

• Reduced conviction

• Profit-taking

• Lack of fresh positions

It doesn’t guarantee a trend reversal, but it shows that the current trend might be weakening.

How traders practically use open interest in decision-making

Most retail traders ignore open interest because they focus only on price. But price is half the story. Open interest adds the missing context, whether the price move is supported by real money or just noise.

When OI supports price movement, it often signals stability. But when OI contradicts price movement, experienced traders become cautious. This combination of price + OI can help you understand:

• Whether the trend is genuine

• Whether a breakout is real or fake

• Whether a reversal is coming

• When big players are entering or leaving

It’s almost like having a backstage pass to understand the market’s behaviour beyond what you see on the surface.

Does high open interest always mean a strong trend?

No, and that’s where many beginners get confused. 
High open interest simply means high participation. A trend becomes strong only when price and open interest move in the same direction. High OI with a flat price can also indicate heavy hedging or indecision.

So, OI must always be read in context, not alone.

Final Thoughts: Why every beginner should learn OI

If you’re new to derivatives, learning open interest is like learning to read the market’s pulse. It helps you understand whether people are actually willing to put money behind a trend or not.

The best part? 
You don’t need advanced math, complicated indicators, or expert-level experience. Just understanding OI patterns alongside price can save you from bad trades and help you catch genuine moves early. Open interest is one of the simplest yet most underrated tools in trading. Once you start using it, you’ll feel more confident, more informed, and definitely more in control of your trades.