Open Interest
Candlefocus EditorTo track open interest levels, traders typically watch a real-time analysis of the market, which provides an aggregated view of all the buyers and sellers of a particular option or futures contract at any given time. A trader can track the number of contract open by any given counterparty, as well as the age of the contracts, which helps to identify emerging trends or sudden changes in sentiment.
Open interest is not just a measure of liquidity, it is also a tool for detecting trend reversals and breakouts. For example, when buyers and sellers are evenly matched, open interest informs traders that a trend is likely to persist. On the other hand, if there is an imbalance between the two sides, then it may suggest a reversal or breakout may occur.
The open interest of an option or futures contract can also provide an indication of the volatility of the underlying asset - specifically, traders can view the open interest of call and put options to assess speculative activity in a given security. This can be useful for anticipating how the underlying asset's price may move in either direction.
Open interest can also be useful for understanding the behaviour of large institutions in the markets. If a large institution has taken up a large number of contracts, then open interest may indicate whether the trend is likely to sustain or reverse itself. This can be beneficial for the individual investor or trader who may rely on institutional money to move the market.
Overall, open interest is an important metric that can assist in monitoring activity in the futures and options market and can offer traders a real-time view of the market sentiment. It is an essential tool for traders to assess liquidity, volatility, and sentiment in the markets. Open interest is an important indicator for understanding market trends and for making informed trading decisions.