Open interest represents simple the total outstanding contracts in any instrument that is traded in derivatives market. Open interest measures how much positions traders have created in that security or instrument. When open interest increase , it means that traders are building more positions in that contract. When open interest decreases , it means traders are decreasing or squaring off their existing positions . We will also understand how to use Open interest along with price for trading.
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Does Futures and Options both have OI?
Every derivative contract of a symbol , example NIFTY will have its own open interest which will represent total outstanding contracts in that particular instrument. Example Nifty 12,000CE (call option) will have its own OI , Nifty current month Future will have its own OI , NIFTY next month Futures will have its own OI , Every strike Call or put will have its own OI.
How to Interpret OI increase or decrease?
Before we learn to interpret Open interest increase or decrease , we must understand how do we take directional view in market .
Example Lets assume Current NIFTY index price is 11800 rs and we want to go long in NIFTY (bullish view) .We can go Long in NIFTY in following ways
Buy Nifty Call Option
Sell Nifty Put Option
Buy current month Nifty Futures
Buy next Month Nifty Futures
Futures and its Open interest
Now traders who want to go long in Nifty and buy Nifty futures will cause increase in Open interest of Nifty Futures Contract of near month (current month) or next month(current month+1) or far month (current month+2). While 90% of traders will trade current month futures buy its highly likely that many traders can also buy next month futures depending on how close we are to current expiry. So if we add futures open interest of all 3 months and compare with sum all futures open interest of yesterday , we get and idea whether traders are building new positions or exiting positions.
Options open Interest
In case of Options , its a bit different explanation . Now we see Options positions with help of option sellers position instead of Option buyers position. You may ask why is it so – reason is that Option sellers have unlimited risk and Option selling requires high margin , so Option sellers are those people who have strong Idea on market , money to move markets or underlying hedged positions. So they basically can protect their positions.
Now when we want to sell open interest in Nifty Puts , we see if Open interest is increasing , Means more puts are getting Sold and put sellers don’t expect markets to go down . Similarly if Calls open interest are increasing , we interpret is at more calls are being sold and call sellers don’t expect market to go up.
Price direction And Change in Open Interest in Futures
When we combine direction of underlying movement and how open interest is changing in futures contract , we get better idea on what type of positions are being build in market . There are below major types of positions that are build ususally
LONG Build up: When there is increase in price of futures and increase in Open interest , we say traders are building long positions. This implies that traders are building new interest in stocks by creating open interest in upward direction. It means they expect price to go up so that they can book profits in Futures.
Short Build Up : When there is decrease in price of futures and increase in its Open interest , we say traders are building Short positions in the underlying futures contract. It means that people are shorting or selling futures or options with anticipation that price will go down. Usually when some stock or index breaks support or reverses from a resistance , we see shorts being built up.
Long unwinding : When prices of Futures contract decrease and Open interest decrease as well , we say that long unwinding is taking place. This usually happens after a big rally when traders start to book profits , thereby reducing open interest. it also means long positions are now getting exhausted and people are starting to book profits , assuming rally is about to over. It may be followd by fresh longs after consolidation or fresh shorts if reversal is to happen
Short covering : When price increases and Open interest decreases , we say that Short covering is happening . This usually happens when stock has fallen too much and now profit booking is needed. In Short covering , the earlier built Short positions are getting decreased and people are booking profits and expecting reversal.
Open Interest Screener and Dashboard
You can check open interest of all Futures and Options strike of NSE listed India stocks at Intradayscreener.com Futures Dashboard. You can get a summary of different positions being build in all futures expiry wise as well as combined.
Using this screener , it very easy to see where traders are building long positions or short positions , or doing profit booking.
Open interest is the total number of outstanding derivative contracts for an asset—such as options or futures—that have not been settled. Open interest keeps track of every open position in a particular contract rather than tracking the total volume traded.
Open interest is the total number of futures contracts held by market participants at the end of the trading day. It is used as an indicator to determine market sentiment and the strength behind price trends.
OI constantly changes as new positions are opened, and existing positions are closed or liquidated. For example, if Trader A buys 100 shares of stock XYZ, and Trader B sells 100 shares of the same stock, the Open Interest for Stock XYZ would be 100, as there is one open contract.
Change in OI can only be used in one perspective to take it as a reference to see what the writer/ buyer are doing. If change in OI is -ve (negative) than it means people are exiting their position. And if change in OI is +ve (positive) than it means people are making new positions.
For example, if 500 futures contracts are traded on a given day, the open interest will be 500 contracts. The next day, if 300 of those original contracts are offset and closed out, the open interest will decrease by 300 contracts down to 200 open positions.
Open interest is a measure unique to the derivatives market. It indicates how many contracts of a particular future or option are open on the market at the moment. This number changes throughout the day as traders buy and sell contracts.
As the price of the underlying security is increasing, high open interest indicates that money is entering the market, new long positions are being taken, and the market is decidedly bullish.
Higher open interest is typically good because it signals more interest in that particular strike price, which also means it's easier to get in and out of the trade. However, sometimes, lower open interest might be a good fit if you have the trend right to get lower entries and more potential contracts.
So, an average put-call ratio of 0.7 for equities is considered a good basis for evaluating sentiment. In general: A rising put-call ratio, or a ratio greater than 0.7 or exceeding 1, means that equity traders are buying more puts than calls. It suggests that bearish sentiment is building in the market.
Open Interest means the Interest of traders during a specific strike price. The higher the amount, the Interest will be more among the traders for the actual strike price of an option. Since there's more Interest among traders, there will be high liquidity to trade your opinion.
Look for a correlation between open interest and price action: If open interest is rising along with price, it indicates that there is a lot of buying pressure in the market. This is a bullish sign. If open interest is falling along with price, it indicates that there is a lot of selling pressure in the market.
Volume and open interest are key technical metrics describing the liquidity and activity of options and futures contracts. "Volume" refers to the number of contracts traded in a given period, and "open interest" denotes the number of contracts that are active or not settled.
Open interest is a measure of the overall activity level in the futures and options market. Every time two parties, ie, the buyer and the seller initiate a fresh position, the open interest increases by a single contract. If the traders or closing the position, then the open interest is lowered by a single contract.
The changes in open interest values are not frequently updated. On the contrary, the total volume is calculated and maintained by the securities exchange at the end of each day.
Open Interest (OI) is a metric that quantifies the total number of futures or options contracts actively in circulation within the market. It's important to note that every trade involves two parties: a buyer and a seller.
Increasing OI means an indication of money flowing in the market. And in declining OI the market is liquidating and traders are exiting their respective trade. A change in OI is an alarm bell for traders that an uptrend or downtrend will be hitting the market.
Open interest represents the total number of unfulfilled derivative contracts, like options or futures, awaiting settlement. Unlike tracking the trading volume, it monitors every open position in a specific contract. This metric offers a precise gauge of a contract's liquidity and interest.
Open Interest means the Interest of traders during a specific strike price. The higher the amount, the Interest will be more among the traders for the actual strike price of an option. Since there's more Interest among traders, there will be high liquidity to trade your opinion.
Negative change in open interest means participants are closing out of their open positions. What is an effective interest rate? What do increasing interest rates mean? How is a profit made by interest rates?
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