Open Interest / Net Short Position

Fig.1 - Open Interest / Net Short Position

The "Open Interest" can be viewed as the total area of all the sails opened on a sailboat, capturing the wind to move the boat. In this context, it represents the total of open contracts in the derivatives market, showing how much "sail" (activity) we have at our disposal.

The "Net Short Position", on the other hand, is like the current flowing against the direction the sailboat wishes to go. When we talk about net short positions, we refer to traders' bets that the price of the asset will fall, akin to a force contrary to the upward movement of prices, just like the current trying to push the boat backward.

Now, by dividing the Open Interest by the Net Short Position, we're measuring the proportion between the propelling force of the sails (market activity) and the opposing force of the current (net short positions).

If this indicator results in a high number, it means that even with many "open sails" catching the wind (many active contracts), the current (net short positions) is relatively weak. That is, despite there being a lot of activity, the bets against the market are not so predominant.

Conversely, a low number indicates that even with fewer sails, the current is strong. This suggests that the net short positions have a considerable impact, perhaps pointing to an expectation of a fall in the prices of the underlying asset. Traders can use this information to understand market dynamics. If there's a lot of activity (high Open Interest) but little current (low Net Short Position), it can be inferred that there isn't a strong expectation of a price drop. If the current is strong (high Net Short Position relative to Open Interest), this may signal a bearish trend, and traders can prepare for possible scenarios of price decline.

By combining this indicator with other analyses and tools, traders can form a more robust and informed strategy to navigate the sometimes turbulent waters of the derivatives market.