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Benefits Of Open Interest

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By Author: Maithili Pawar
Total Articles: 30
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Derivatives are handy for price fluctuation protection. These get traded on exchanges such as commodities, stocks, and currency, apart from being a hedge against price fluctuations.

Two types of derivatives exist in the market – futures and options.

Trading in F&O allows those who are disinterested in the underlying asset to profit from price fluctuations. Most F&O market participants are speculators, who are not involved in the commodity at all.
This is good because it adds to the competitiveness of the market.

To make things lucrative, the open interest gets applied to F&O. It is the cumulative amount of outstanding contracts which are owned at the end of the day by market participants.

It may also be specified as the total number of futures contracts or option contracts not yet exercised (squared off), expired, or fulfilled through delivery.

It primarily relates to the futures market. Open interest, or the total number of available securities contracts, is also used to validate patterns and trend reversals for contracts of futures and options.
What is open interest? It tracks capital flows to the futures market.

There must be one buyer of that contract for each seller of a futures contract. Therefore, a seller and a buyer combine to create just one deal.

Therefore, to determine the total open interest for any given market, we only need to know the totals from either side, buyers or sellers, not the sum of both.

The status recorded each day reflects the increase or decrease in the number of contracts for that day and gets displayed as either a positive or negative number.

How to calculate Open Interest?

Every trade concluded on the exchange affects that day's level of open interest.

For example, if both parties introduce a new position to the trade (one new buyer and one new seller), open interest will grow by one contract.
When both traders close a new or old position, then open interest would be rejected by one deal.

The third and final possibility is that an old trader will transfer his position to a new trader. The open interest is not going to change in this case.

Benefits of monitoring open interest

Some conclusions about the day's operation can be drawn by tracking the fluctuations in the figures at the end of each trading day.

Declining open interests means the market is liquidating and implies ending the prevailing price trend. Open interest information can prove useful towards stopping significant market movements.

Author bio: Maithili Pawar is a financial expert with 5-plus years of experience in investment banking. In her free time, she writes on trading topics. In this, she has explained everything about open interest and listed its benefits

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