Five Ways Cryptocurrency Derivatives Open Interest (OI) Can Change
Open interest represents the total number of outstanding contracts in the market at any given time and is updated according to trade activity and position changes. Open interest for derivatives typically changes when new positions are created or existing positions are closed. Changes in open interest in certain contracts can sometimes signal unusual options activity and future price movement. Here are some common scenarios that can lead to changes in open interest:
1) Opening a new position When a trader opens a new position by buying or selling a derivative contract, it adds to the open interest. For example, if a trader buys a futures or options contract, the open interest increases by one.
2) Closing an existing position When a trader closes an existing position by offsetting their position or letting the contract expire, it reduces the open interest. For instance, if a trader sells a previously bought futures contract, the open interest decreases by one.
3) Spreading or spreading out positions In some cases, traders may spread their positions by simultaneously opening both buy and sell positions in related derivative contracts. This does not change the total open interest but affects the open interest for each specific contract.
4) Unwinding or rolling over positions Traders may unwind or roll over their positions by closing existing contracts and simultaneously opening new contracts with different expiration dates. This can result in changes in open interest for the involved contracts.
5) Delivery or exercise of contracts If a derivative contract is settled through physical delivery or exercise, the open interest for that contract may reduce as it is fulfilled. As of writing, most cryptocurrency option contracts on Binance/DeriBit are cash settled and not physically delivered at expiry.
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