Opening Up on Open Interest
The question is not if open interest (OI) is increasing or decreasing, but who is causing the change—weak hands like the public or strong hands like the commercials?
That’s the question that needs to be answered. So what if prices are rallying in a nice uptrend. The telling issue is whether a concomitant increase in OI is being caused by the public adding long positions while the commercials are decreasing their longs or the commercials adding longs while the public is doing the selling. It’s not so much OI that controls the market as it is who (which side or team) is controlling OI.
With that in mind, let’s go back to the first chart presented in the preceding chapter, where we saw that an increase in OI actually led to market tops, something that is not supposed to happen. This time, though (see Figure 9.1
), I have shown not only OI but also the commercials’ net long/short position, the dotted line. This line goes up when they are adding longs or closing out shorts and down when they are selling shorts or exiting longs. Now we have the ability to look inside OI to see what the major players in the game, the commercials, are doing and how that relates to OI.
What we see is that the OI increase in October 2003 was not caused by the commercials. They were leaving or selling. So who caused the increase? There are only two other parties, large or small traders. They are the ones that created the increase in OI, adding to long positions at the ...