Let’s move beyond the example of Sita and Noor and consider the entire housing market of Mumbai. Just like the before mentioned characters, suppose 12 other people have agreed to buy houses from 12 other sellers after 6 months. So the total number of futures contract that are open is 12+1 = 13. Suppose 2 days later another futures contract is signed, then the open interest increases by 1 to 14. Now let’s assume Sita sells her futures contract to her friend Rita, who is also interested in buying Noor’s apartment. The contract is now between Noor and Rita. However the number of open interest’s still remains at 14 as Rita merely took Sita’s position as the buyer and did not enter into a new contract.
If out of the 14 open contracts one of the set of buyers and sellers execute the transaction i.e buy/sell the house, the number of open interest drops by 1 to 13.
Hence when an investor who has bought / sold a futures contract does not complete the transaction by subsequently selling / buying the contract or actual delivery or receipt of the stock / commodity, the contract is said to be “open”. Open interest (OI) is the number of futures contract that are yet to be settled and exist on the books of the clearinghouse / stock exchange.
A single purchase and sale, involving two transacting parties – constitutes an OI of 1. OI is a measure of the flow of money into futures market. Increasing OI represents new or additional money flowing into the market. Decreasing OI indicates money flowing out of the market.