What is Open Interest?
Open interest refers to the total number of outstanding options and futures contracts that have not been settled, closed out, or exercised. In simple terms, it's the number of active positions in options and futures contracts. For example, if a buyer and a seller enter into a new call option contract, open interest increases by one. Conversely, if the same buyer and seller close their contract by taking an opposite position, open interest decreases by one. If the buyer sells their contract to another buyer, the open interest remains unchanged, as there is no net change in open positions.
How to Use Open Interest for Intraday Trading
- Bullish Trend: If the stock price rises along with an increase in open interest and volume, it shows a bullish trend.
- Bearish Trend: If the stock price falls along with an increase in open interest and volume, it shows a bearish trend.
- Moderately Bearish: If the stock price rises but open interest and volume decrease, it shows a moderately bearish trend.
- Moderately Bullish: If the stock price falls but open interest and volume decrease, it shows a moderately bullish trend.
Open Interest vs. Volume
Importance of Open Interest
Monitoring open interest provides valuable insights for making decisions in financial markets. Here are some key points:
- Market Sentiment Indicator: Changes in open interest shows bullish or bearish sentiment of the market.
- Price Trend Confirmation: Rising open interest signal uptrends, while falling open interest may signal downtrends.
- Reversal Indication: Sudden changes in open interest can hint at trend reversals.
- Liquidity and Trading Activity: High open interest shows increased market liquidity and trading activity.
- Options Expiry Consideration: Important in options trading, helps in influencing decisions around expiry dates.
- Contrarian Indicator: Analyses extreme open interest situations for potential contrarian trading opportunities.
Example in INR
Suppose an investor is tracking a stock with the following details:
- Current Stock Price: ₹500
- Open Interest: 10,000 contracts
- Volume: 5,000 contracts
Conclusion
By analyzing open interest along with volume and price action, you can identify market trends. Once you've identified the trend, you can take appropriate positions. To get specific open interest data for an asset, use an open interest calculator, which is often available online for free.