Open interest

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In financean equity derivative is futures and options basics wikipedia class of derivatives whose value is at least partly derived from one or more underlying equity securities. Options and futures are by far the most common equity derivatives, however there are many other types of equity derivatives that are actively traded. Equity options are the most common type of equity derivative. In financea warrant is a security that entitles the holder to buy stock of the company that issued it at a futures and options basics wikipedia price, which is much lower than the stock price at time of issue.

Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, binary packages in relationship make them more attractive to potential buyers.

Convertible bonds are bonds that can be converted into shares of stock in the issuing companyusually at some pre-announced ratio. It is a hybrid security with debt- and equity-like features.

It can be used by investors to obtain the futures and options basics wikipedia of equity-like returns while protecting the downside with regular bond-like coupons.

Investors can gain exposure to the equity markets using futures, options and swaps. These can be done on single stocks, a customized basket of stocks or on an index of stocks. These equity derivatives derive their value from the price of the underlying stock or stocks. Stock markets index futures are futures contracts used to replicate the performance of an underlying stock market index. They can be used for hedging against an existing equity position, or speculating on future movements of the index.

Indices for OTC products are broadly similar, but offer more flexibility. Equity basket derivatives are futures, options or swaps where the underlying is a non-index basket of shares.

They have similar characteristics to equity index derivatives, but are always traded OTC over the counter, i. Single-stock futures are exchange-traded futures contracts based on an individual underlying security rather than a stock index.

Their performance is similar to that of the underlying equity itself, although as futures contracts they are usually traded with greater leverage. Another difference is that holders of long positions in single stock futures typically do not receive dividends and holders of short positions do not pay dividends.

Single-stock futures may be cash-settled or physically settled by the transfer of the underlying stocks at expiration, although in the United States only physical settlement is used to avoid speculation in the market. An equity index swap is an agreement between two parties to swap two sets of cash flows on predetermined dates for an agreed number of years. Swaps can be considered a relatively straightforward way of gaining exposure to a required asset class.

Futures and options basics wikipedia can also be relatively cost efficient. An equity swap, like an equity index swap, is an agreement between two parties to swap two sets of cash flows. In this case the cash flows will be the price of futures and options basics wikipedia underlying stock value swapped, for instance, with LIBOR.

A typical example of this type of derivative is the Contract for difference CFD where one party gains exposure to a share price without buying or selling the underlying share making it relatively cost efficient as well as making it relatively easy to transact. Futures and options basics wikipedia examples of futures and options basics wikipedia derivative securities include exchange-traded funds and Intellidexes.

From Wikipedia, the free encyclopedia. Stock market index future. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Derivatives finance Options finance.

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Open interest also known as open contracts or open commitments refers to the total number of outstanding derivative contracts that have not been settled offset by delivery. For each buyer of a futures contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered 'open'. Many [ citation needed ] technical analysts believe that a knowledge of open interest can prove useful toward the end of major market moves.

For some [ citation needed ] option traders, open interest indicates the intensity of trading in a financial instrument. If open interest increases suddenly, it is likely [ citation needed ] that new information about the underlying security has been revealed, which may indicate a near-term rise in the underlying security's volatility. However, neither an increase in volatility nor open interest necessarily indicate anything about the direction of future price movements.

A leveling off of open interest following a sustained price advance is often [ citation needed ] an early warning of the end to an uptrending or bull market. Technical analysts view [ citation needed ] increasing open interest as an indication that new money is flowing into the marketplace. From this assumption, one could conclude that the present trend will continue.

Analogously, declining open interest implies that the market is liquidating, and suggests that the prevailing price trend is coming to an end. A common misconception is that open interest is the same thing as the number of option contracts traded. The difference between the two can be explained with a short scenario here;.

Further, according to the definition of open interest in this entry, a change in open interest indicates a difference in the number of buyers and sellers of a financial instrument, or at a minimum an increase or decrease in the size of participants' positions. Like volatility, it has no directional component, it is just a tally of unsettled contracts. For example, if trader X buys 2 futures contracts from trader Y who is the seller , then open interest rises by 2. If another trader A buys 2 futures contracts from trader B, then the open interest rises to 4.

Now, if trader X unwinds his position and the counter party is either Y or B, then the open interest in the system will reduce by that quantity. But if X unwinds his position, and the counter party is a new entrant, say C, then the open interest will remain unchanged. The level of outstanding positions in the derivatives segment is one of the parameters widely tracked by the market.

One complication involved when looking at the overall level of open interest in a futures market is the impact of deliveries. In a physically-delivered commodity, when delivery ultimately takes place the contract that has been delivered is no longer included in the overall open interest tally.

Open interest provide useful information that should be considered when entering an option position. First, let's look at exactly what open interest represents. Unlike stock trading, in which there is a fixed number of shares to be traded, option trading can involve the creation of a new option contract when a trade is placed. Open interest will tell you the total number of option contracts that are currently open—in other words, contracts that have been traded but not yet liquidated by either an offsetting trade or an exercise or assignment.

For example, say we look at Microsoft and open interest tells us that there have been 81, options opened for the March You may be wondering if that number refers to options bought or sold. The answer is that you have no way to know for sure how many transactions have taken place but you do know that there are 81, options contracts that remain open. Since there is 1 bought position and 1 sold position for each of these contracts, there are 81, positions that remain bought to 'open' and 81, positions that remain sold to 'open' for the March There are always the same number of positions on either side of the open transactions.

So, when an option is traded with one party opening and one party closing, the open interest remains unchanged. If both parties in the transaction are closing positions then the open interest decreases accordingly.

If both parties are opening positions then the open interest goes up accordingly. One way to use open interest is to look at it relative to the volume of contracts traded.

When the volume exceeds the existing open interest on a given day, this suggests that trading in that option was exceptionally high that day.

Open interest can help you determine whether there is unusually high or low volume for any particular option. Open interest also gives you key information regarding the liquidity of an option.

If there is no open interest for an option, there is no secondary market for that option. When options have large open interest, it means they have a large number of buyers and sellers, and an active secondary market will increase the odds of getting option orders filled at good prices.

So, all other things being equal, the bigger the open interest, the easier it will be to trade that option at a reasonable spread between the bid and ask. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend up, down or sideways will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end.

A knowledge of open interest can prove useful toward the end of major market moves. A leveling off of open interest following a sustained price advance is often an early warning of the end to an uptrending or bull market.

An increase in open interest along with an increase in price is said [ citation needed ] to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend.

An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal. The relationship between the prevailing price trend and open interest can be summarized by the following table: From Wikipedia, the free encyclopedia. This article contains weasel words: Such statements should be clarified or removed. This article's tone or style may not reflect the encyclopedic tone used on Wikipedia.

See Wikipedia's guide to writing better articles for suggestions. November Learn how and when to remove this template message. Fundamentals of the futures market. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Derivatives finance Technical analysis.

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