What is open balance or open interest?
Open balance is the total number of options or futures contracts that are ‘open’, meaning they are currently owned by an investor and have not yet expired.
Details
First, think in terms of options contracts: by owning an option, it means that there is an interest in actually trading that stock, albeit at a different price. Since this represents your “interest” in owning it, the “open interest” is how many shares people might be interested in trading, even if they don’t actually trade. Open balance should not be confused with volume; it is just the total number of options or futures that are owned and have not yet expired. A second definition of open balance is the amount before the market opens, that is, the number of open buy orders before the market officially opens, because it shares the same idea (how many shares people are thinking about trading, even if those trades haven’t happened yet).
Example
| Today | Trading | Open balance | Summing up |
| 1 | Trader A buys 1 option and trader B sells 1 option (for options and futures if there is a buyer there must always be a seller) | 1 | There is a purchased option currently. The seller does not count in this case. |
| 2 | C buys 3 and D sells 3 | 4 | A and C now own 4 options between them. |
| 3 | A sells 2, C sells 3 and D buys 5 | 2 | A still has 1 sold (option written), B has 1 sold, C owns 0, D has 2, if we look at the purchase the open balance is 2 despite the volume being 5 |
| 4 | C buys 5 and D sells 5 | 2 | Since the options have just changed hands, the open interest remains the same. The volume is 5 again. |
| 5 | A sells 3, B buys 3, C buys 2, D sells 2 | 9 | A now has 4 sold, B has 2, C owns 7 and D has 5 sold |
As you can see, these transactions can get very complicated very quickly. However, the usefulness is undeniable, as it shows how many people are “interested” in the option. Since open interest indicates the number of “open” options bought, this can give an indication of market sentiment and thus the strength of the current trend. If there is very little open interest but a lot of volume, it can be a good opportunity to check why so many people are selling off their options. On the other hand, a sudden jump in open interest may indicate that an increase in volatility is likely but provides little information about the direction of the trend.
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