Meaning
Open Interest also know as OI, is the total number of options and
futures contracts that are not closed on a particular day. As you might
be aware of volume in a particular stock in equity market, option
trading involves the creation of a new option contract when a trade is
placed. Open interest will tell you the total number of option contracts
that are currently open.
Open Interest is mostly used to confirm a trend for a particular
futures contract, For eg, lets look at Reliance 1000 May CALL, the open
interest might tell us that there have been 5 options open in the month
of May, a trader might then wonder does this refer to the number of
contracts bought or sold.
Working
When a trader buy’s or sell’s an option, the transaction needs to be
entered as either an opening or a closing transaction. If he buy’s 5
RELIANCE May 1000 CALL, he is buying the calls to ‘open’, i.e he is
opening his position in a futures contract, which causes the Open
interest to rise by 5, and then after sometime(within) the month he
decides to sell his contract i.e close his position in a particular
contract, then he is causing the open interest to go down by 5.
Open interest applies primarily to the futures market, it helps the
measure the flow of money into the futures Market. For each seller of a
futures contract (eg RELIANCE 1000 CALL) there must be a buyer of that
contract. Thus a seller and a buyer combine to create only one contract.
A rise in open interest in a futures contract along with its price
indicates bullishness, which means investors are creating long positions
and vice versa.
The open interest position that is reported each day represents the
increase or decrease in the number of contracts for that day, and it is
shown as a positive or negative number.
Advantages of monitoring Open Interest
Changes in the Open Interst as mentioned earlier can help a trader interpret the future trend of a particular contract.
Open Interest RISING -> Indicates that the present trend (up, down, flat) will continue
Open Interest FALLING-> Indicates that the prest trend(up, down, flat) is likely to change or is coming to and end
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Contract Price
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Open Interest (%)
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Future Trend(predicts)
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Rising
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Rising
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The Contract is likely to trade strong in the coming days
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Rising
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Falling
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The Contract is likely to see some downside in the coming days
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Falling
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Rising
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The Contract should not be entered as of now
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Falling
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Falling
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The Contract can be entered, as its likely to go up
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