Also known as open interest, an open position is any type of financial transaction that has not yet been closed out with the use of a corresponding opposite transaction. Until both components have been fully executed, the transaction is not considering complete or closed. While the term can be applied to any financial situation where a transaction has not been matched an appropriate opposite transaction, the term is most often used to refer to the status of futures contracts within a specified delivery month.
In the broadest sense, an open transaction is any type of financial arrangement where a purchase or sale has been agreed upon, but the deal has not yet been settled by some form of physical payment. A state of open position also exists if there was some agreement to make a simultaneous transaction that moved in the opposite direction, but that transaction has not yet taken place. Until both processes have been completed, the deal is still in progress and therefore open.
An easy illustration would be two individuals choosing to sell each other their private vehicles. One individual delivers full payment for the opposite vehicle, and assumes control of the purchase. The other individual has yet to render payment for the second vehicle, so the agreement between the two remains incomplete, or open. To close the deal, the second individual must either follow through, make the payment, and assume control of the car, or return the payment received from the first party and regain control of his or her original vehicle. Both of these solutions would move the deal from an open to a closed status.
An open position can be in the form of a net long position or a net short position. The key is that the asset has either been delivered or is being delivered without cover. This means that there has not yet been a matching transaction to complete the process, thus leaving the transaction in an open state. Once the opposing transaction has taken place, then the position is no longer open, but is considered completed in full.
The futures market is the site of many futures contracts being in an open position in any given delivery month. There are a number of reasons why a given contract may be open, including market fluctuations that are currently taking place, and the fact that some of those futures contracts have a long position, meaning they are not due to be closed in the present delivery month. An open position is not an undesirable status, and is often simply one strategy of positioning futures holdings to ultimately realize the best possible return on the investment.
