OI insights on the years last expiry
Introduction to open interest
Open Interest is the total number of outstanding contracts or open contracts to the total number of derivatives contracts that have not been settled. It is the open commitment held by market participants at the end of the day. For each buyer of a futures contract, there must be a seller, from the time the buyer or seller opens the contract unless the counter party closes it, the contract is considered open.
New traders get confused between volume and open interest. Eg if A buys 100 shares of Reliance and B sells 100 shares of Reliance then the volume is 200 shares. Now if A buys 1 contract (lot) of Reliance and B sells 1 contract (lot) of Reliance the open interest will be one contract (lot).
The flow of money into the futures market is measured by open interest. For each seller of a futures contract, there must be a buyer of that contract. Thus a buyer and seller come together to create one contract. The open interest position gets reported daily and represents the increase or decrease in the number of contracts for that day.
The relationship between open interest and price movement can be interpreted as mentioned below.
| Open Interest | Price | Interpretation |
| Rising | Rising | Bullish sign (long) |
| Rising | Falling | Bearish sign (short) |
| Falling | Rising | Bullish sign (short covering) |
| Falling | Falling | Bearish sign (long covering) |
Based on open interest PUT/ CALL ratio can be calculated:
Put Call ratio (PCR) is the ratio of total open interest (OI) in put option vs total OI in call option.
If the put call ratio is high, it signifies that there are more put options sellers and that the market is likely to go up. If the put call ratio is low it signifies more sellers of call options and an indication that the market is likely to go down.
Traders also see open interest in price charts and apply technical analysis for trends and direction. Open interest is studied for support and resistance. For eg in the chart below Bank Nifty OI, the build-up is in the 43000 strike call option, traders interpret it as resistance. On the downside OI build-up is in the 42500 strike put option, traders interpret it as support.
Conclusion
- Open interest tells us how many contracts are currently outstanding or open in the market
- Open interest is a continuous data
- Open interest increases when new contracts are added
- Open interest decreases when contracts are squared off
- PCR is based on open interest and is a contrarian indicator
- Traders study open interest in direction and support and resistance
