The following is reprinted from the Chicago Board of Trade
Volume and Open Interest
Next to price, volume is the most frequentlycited statistic in reference to a futurescontract’s trading activity. Each unit of volumerepresents a contract traded. When a traderbuys a contract and another trader sells thatsame contract, that transaction is recordedas one contract being traded. Therefore,the volume is the total number of long orshort positions.Open interest, on the other hand, refers to thenumber of futures positions that have not beenclosed out either through offset or delivery. Inother words, the futures contracts that remainopen, or unliquidated, at the close of eachtrading session.To illustrate, assume that a trader buys 15contracts and then sells 10 of them back tothe market before the end of the trading day.His trades add 25 contracts to the day’s totalvolume. Since 5 of the contracts were notoffset, open interest would increase by 5contracts as a result of his activity.Volume and open interest are reported dailyand are used by traders to determine theparticipation in a market and the validity ofprice movement. For instance, if a marketmoves higher on low volume some tradersmay not consider this an important pricemovement. However, the same pricemovement on high volume would indicatethat an important trend may be emerging.Combining volume and open interest alsoyields an interesting perspective on themarket. If a contract experiences relativelylow volume levels but high open interest,it is generally assumed that commercialparticipation, via the commitment of traders report is high. This is becausecommercial hedgers tend to use the marketsfor longer-term hedging purposes, puttingtheir trades in and keeping them until they’reno longer needed to manage a given pricerisk. Conversely, high volume with low openinterest may indicate more speculative marketactivity. This is because the majority ofspeculators prefer to get in and out of themarket on a daily basis.
