Options and Commitments of Traders Report
Though I’ve talked mainly about futures when discussing open interest, you can have open interest figures when trading options. They are not quite the same, as contracts in futures markets are a commitment, and open interest measures that commitment; with options, contracts can expire without being exercised if they never come ‘in the money’, so the number of contracts can be misleading.
Nevertheless, open interest figures are published daily for put and call options. They provide valuable information and the more information you can get when trading, the better. Basically, open interest is a measure of the trading interest and the liquidity. Traders will review open interest and the volume of put and call options to determine the market sentiment and whether it is reaching an extreme.
Options traders will also compare the open interest in call options to the open interest in put options to gauge whether the market is bullish or bearish. Calls are bullish and puts are bearish. This comparison can also be done by comparing call volume and put volume, and some traders work out put/call volume ratios. This ratio falls when the number of calls increases, which is bullish. When the ratio increases it indicates a bearish market. If calls are much higher than puts, then it points towards an overbought market. If there are more puts than calls, then the market may be oversold.
Commitments of Traders Report
If you want to find out more about open interest for particular commodities, you can use the Commitments of Traders Report which is released by the Commodity Futures Trading Commission (CFTC) every Friday. If you point your browser to www.cftc.gov, you can click through to Market Reports and Commitments of Traders is on the top of the list.
The report shows open interest, and breaks it down by the type of trader, whether it is a producer or user taking a hedging position, a dealer speculating, or ‘other’ which includes small traders such as you. You can compare the positions of the participants as the long and short figures are given.
You will often want to give more credence to the hedgers than the speculators, as they are usually more likely to be right. So if they have a majority of long positions, with the speculators and traders taking the short side, it suggests a bullish market and if the current trend is down could signal a reversal. If in a rising market the commercial hedgers seem to be going short while traders both large and small are taking long positions, you should watch whether the market is reaching a top. So what?