Open Interest Compression

Open interest is the total number of outstanding derivative contracts that have not been settled. Compression refers to a rapid reduction in this number, usually due to mass liquidations or traders closing positions out of fear.

When open interest drops sharply, it indicates that market participants are fleeing the asset or that the market is being cleared of leveraged bets. This can lead to a period of lower volatility, but it also signals a loss of confidence.

For market makers, lower open interest can mean less trading activity and reduced revenue. For the market, it often marks the end of a speculative bubble.

Tracking changes in open interest is a key part of trend forecasting. It provides insight into the sentiment and leverage levels of the broader market.