Trade Stocks and Commodities with the Insiders: Secrets of the COT Report

CHAPTER 8

The Breakthrough

Getting Inside Volume and Open Interest

I saw a man with a wooden leg and a real foot.

While most people understand that stocks move due to volume, many stock players are not familiar with one of the major differences between stocks and commodities. This difference is open interest (OI). Unlike stocks, this is a zero-sum game. For every dollar won, a dollar is lost. There is always a total of all the short positions, called short open interest. On the other side of the coin there is long open interest, the total of all the positions initiated on the long side. Total open interest is the net of these two numbers and has been suggested by numerous authors as a key tool to understanding market moves.

The difference between volume and OI should be noted. We may have a day that trades, for example, 550,000 contracts. That’s the total of buying and selling contracts for the day. Many of these buys and sells may have been closed out during the day by day traders or by short-term traders exiting a trade from a prior day. Open interest, in contrast, is the net number of contracts at the end of the day.

Let me explain. In the stock market a company issues a certain number of shares (float), and that’s it—there are no more shares to trade. In commodities there is no finite number of contracts or float. It is open ended. As long as a new buyer comes in and there is a new seller, OI will increase. At times there may be more volume (i.e., contracts traded) than total ...