Everyone out of, yesterday’s hangover????. Okie.. so today I thought, let me put something on Open Interest(OI).I have many a friends who were interested in this(including me ..of course!!!).since I myself am, pretty ignorant about the topic, so decided to seek help from two of my close friends and fellow traders. The credit goes to them for making this post possible. They are Mayuresh(a musik junkie, watches more of rock vids than charts!!!) and Jimmie(OI geek.. swears by it, and the man who got me interested in OI).I have posted a chart on OI by Jimmie…you see when most of us were still tryin2figure out, to be a bull or a bear(2 b or not 2 b!!!) this guy had already taken his stand, based on OI figures. Before I begin, I’d like to tell them “Thank You Guys”. Here it goes….Beware… it might get a bit boring…but then such is the life dearies!!!
What Is Open Interest?
Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day.
It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery.
Open Interest applies primarily to the futures market. Open Interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.
Open Interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.
Therefore, to determine the total Open Interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.
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.
How To Calculate Open Interest?
Each trade completed on the exchange has an impact upon the level of Open Interest for that day.
For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract.
If both traders are closing an existing or old position ( one old buyer and one old seller) Open Interest will decline by one contract.
The third and final possibility is one old trader passing off his position to a new trader ( one old buyer sells to one new buyer). In this case the Open Interest will not change.
Benefits Of Monitoring Open Interest!!!
By monitoring the changes in the Open Interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn.
Increasing Open Interest means that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue.
Declining Open Interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. Here having some knowledge of Open Interest can prove useful towards the end of major market moves.
A leveling off of Open Interest following a sustained price advance, is often an early warning of the end to an up trending or bull market.
Open Interest - A Confirming Indicator???
An increase in Open Interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in Open Interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while Open Interest remains flat or declining may indicate a possible trend reversal.
The relationship between the prevailing price trend and Open Interest can be summarized by the following table.
Open Interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.
Therefore, to determine the total Open Interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.
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.
How To Calculate Open Interest?
Each trade completed on the exchange has an impact upon the level of Open Interest for that day.
For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract.
If both traders are closing an existing or old position ( one old buyer and one old seller) Open Interest will decline by one contract.
The third and final possibility is one old trader passing off his position to a new trader ( one old buyer sells to one new buyer). In this case the Open Interest will not change.
Benefits Of Monitoring Open Interest!!!
By monitoring the changes in the Open Interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn.
Increasing Open Interest means that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue.
Declining Open Interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. Here having some knowledge of Open Interest can prove useful towards the end of major market moves.
A leveling off of Open Interest following a sustained price advance, is often an early warning of the end to an up trending or bull market.
Open Interest - A Confirming Indicator???
An increase in Open Interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in Open Interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while Open Interest remains flat or declining may indicate a possible trend reversal.
The relationship between the prevailing price trend and Open Interest can be summarized by the following table.
Price | Open Interest | Interpretation |
Rising | Rising | Market is Strong |
Rising | Falling | Market is Weakening |
Falling | Rising | Market is Weak |
Falling | Falling | Market is Strengthening |
How To Use Puts & Calls As Supports And Resistance???
Taking current level of index, just select the 4 calls and 4 puts from that price & current level put & call. In a way the current spot price acts as pivot. Important thing to keep in mind is select Puts & Calls in multiples of 100s and not in 50s.
For eg. : Suppose nifty spot price is at 4890
Then,
Calls: 4900, 5000,5100,5200,5300
Puts: 4800, 4700,4600,4500,4400
shall be selected.
Now just watch the Open Interest in all these options. In ascending order for calls & descending order for puts. Highest Open Interest in any call shows strong resistance and highest Open Interest in put gives idea about support. Suppose market goes beyond those call or put levels then that resistance converts in support and visa versa.
Put Call Ratio: The put call ratio tells us where market is likely to be active.. Put Call Ratio of 1 suggests neutral, below 1 is bearish, 0.8 is oversold while above 1 is bullish and above 1.25 it is getting overbought.
PCR shall always be good or above 1.25 for shorting.
Rest in terms of Open Interest of options it is same like futures. Similarly you can use Open Interest of futures in conjunction with Puts & Calls. Open Interest is higher in Puts, than Calls, and Open Interest is also increasing in futures, this indicates that market is getting ready for a fall. At that time PCR is definitely higher that 1.25.
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