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How to Interpret and trade Open Interest

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How to Interpret and trade Open Interest

Open Interest

In F&O Market Open Interest (OI) plays a significant role for taking decisions in intraday trading as well as initiate a contract.

Open interest is the Number of existing contracts held by buyers or sellers for any market for any given day. Open interest reflects total long positions or total short position.

Open Interest (OI)  rises when a new buyer and a new seller comes to the initiate a position in Stock market. Open Interest (OI) decreases when a long and a short position is closed. When both long and short position closed  OI falls one contract. Open Interest is unchanged when a Long position is closed and a new long position is initiated against it. The same applies to short position.

 

Buyer                                                                    Seller                                Open interest

Fresh Buyer                                            Fresh Seller                        Rises

Fresh Buyer                                            Previous buyer                 No Change

Previous seller  buys to Cover                    New Seller                       No change

Previous Seller buys to cover                     previous Buyer                 Decreases

Open interest Reflects market sentiment. When Buyers and sellers don’t feel the market will not move in their favor they will exit their contracts and OI Decreases. Open interest is a good indicator for seasonal changes, for intraday changes.

When Open Interest Increases Price falls safer to go short because intraday traders likely to push the prices lower.

When Open interest is rising but the price is range bound means More selling pressure.

When OI decreases but the price is range bound means more buying pressure.

Open Interest decreases sharply  during rally bulls are profit booking and bears are getting ready to sell.

Open Interest decreases sharply  during decline bears are profit booking and Bulls are getting ready to Buy.

A change of 10 % in OI means a signal to reversal  more than 30 % change expect immediate change in Direction of the particular contract.

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