Series – II: What is Open Interest (OI) & How you can predicate trend of Index / Stocks.
Before getting into understanding Open Interest, we will go through what are Derivatives?
Derivatives are financial securities that do not have an independent value and rely on the value of an underlying asset. Futures and Options are two popular derivatives in the capital market.Futures and Options are primarily called as F&O in our stock market.
What Is Open Interest?
Open interest is the total number of outstanding derivative contracts that are held by market participants at the end of the trading day. In simple words it is total number of futures contracts or option contracts that have not yet been exercised / squared off or expired. That is why OI tells us how many derivative contracts are currently open in market for specific security.
Calculating Open Interest :
Open interest is calculated by adding all of the contracts that are associated with opening trades and subtracting all of the contracts that are associated with closing trades.
Let’s illustrate Open Interest (OI) with an example.
There are two sorts of traders who make the market place – a buyer and a seller.
For example, if three traders (trader A, trader B, and trader C) are all trading in the Nifty futures, their trades might affect the open interest in the following way:
Scenario 1 :
Trader A enters a buy or long trade by buying one lot of Nifty futures.
Result – Open Interest (OI) will increase to 1.
Scenario 2 :
Trader B enters a buy
or long trade by buying 4 lots of Nifty futures.
Result – Open interest (OI) will change by 4 and increases to 5.
Scenario 3 :
Trader A exits his
position by selling 1 lot of Nifty futures.
Result – Open interest (OI) will change by 1 and decrease to 4.
Scenario 4 :
Trader C enters a
sell or short trade by selling 3 lots of Nifty futures.
Result – Open interest (OI) will change by 3 and increase to 7.
|Scenarios||Trade in Nifty Futures||Change in Open Interest|
|1||Trader A enters a buy or long trade by buying 1 lot of Nifty futures||Open Interest increases to 1|
|2||Trader B enters a buy or long trade by buying 4 lots of Nifty futures||Open Interest increases to 5|
|3||Trader A exits his position by selling 1 lot of Nifty futures||Open Interest increases to 4|
|4||Trader C enters a sell or short trade by selling 3 lots of Nifty futures||Open Interest increases to 7|
Difference between Volume and Open Interest (OI):
Do not confuse OI with volume. It is not the same as volume. With volume, both entries and exits cause the volume to increase, but with open interest, entries cause open interest to increase, while exits cause open interest to decrease.
Interpretation of Trend with Price, Volume & Open Interest movement :
The change in Open interest does not really convey any directional view on markets. However it does give a sense of strength between bullish and bearish positions.
The following tables summarize the trend prediction with change in OI respect to price and volume:
Now, the last & most essential point where to get this data:
Goldmine’s clients can see live data in their Trading Software under F5 tab. Here both total Open interest (OI) and change in Open interest (OI) is available. For other users, spot this data with help of below link