After reading this, you will be able to interpret OI data in conjunction with the Volumes to make better decisions while trading. Also, I would suggest you refresh your understanding on Volumes from here.
Open Interest OI is a number that tells you how many futures or Options contracts are currently outstanding open in the market. Remember that there are always 2 sides to a trade — a buyer and a seller. Let us say the seller sells 1 contract to the buyer.
The open interest in this case is said to be 1. Let me illustrate OI with an example. Let us go through their day to day trading activity and observe how open interest varies. Please note, you need to exercise some patience while understanding the flow of events below, else you can quite easily get frustrated! Arjun buys 6 futures contracts and Varun buys 4 futures contracts, while Neha sells all of those 10 contracts. This is summarized in the table below.
Neha wants to get rid of 8 contracts out of the 10 contracts she holds, which she does. John comes into the market and takes on the 8 shorts contracts from her. It was a simple transfer from one person to another. Hence the OI will still stand at To the existing 8 short contracts, John wants to add 7 more short positions, while at the same time both Arjun and Varun decide to increase their long position. Hence John sold 3 contracts to Arjun and 2 contracts to Varun.
Note, these are 5 new contracts created. Neha decides to close out her open positions. By going long on 2 contracts, she effectively transferred 2 of her short contracts to John and hence Neha holds no more contracts.
The table now looks like this:. A big guy named Vikram comes to the market and sells 25 contracts. John decides to liquidate 10 contracts, and hence buys 10 contracts from Vikram, effectively transferring his 10 contracts to Vikram. Arjun adds 10 more contracts from Vikram and finally Varun decides to buy the remaining 5 contracts from Vikram. OI would now stands at Vikram decides to square off 20 of the 25 contracts he had sold previously.
So he buys 10 contracts each from Arjun and Varun. This means, 20 contracts in system got squared off, hence OI reduces by 20 contracts. The final summary is listed in the table below. So on and so forth; I hope the above discussion is giving you a fair sense of what Open Interest OI is all about.
The OI information just indicates how many open positions are there in the market. Here is something you should have noticed by now. In fact this is one of the primary reasons derivatives is often termed as a zero sum game!
As of 4 th March , OI on Nifty futures is roughly 2. It means that there are 2. Also, about 55, or 0. OI is very useful in understanding how liquid the market is. Bigger the open interest, more liquid the market is. Open interest information tells us how many contracts are open and live in the market.
Volume on the other hand tells us how many trades were executed on the given day. For every 1 buy and 1 sell, volume adds up to 1. For instance, on a given day, contracts were bought and were sold, then the volume for the day is and not Clearly volumes and open interest are two different; buy seemingly similar set of information.
The volume counter starts from zero at the start of the day and increments as and when new trades occur. Hence the volume data always increases on an intra-day basis. However, OI is not discrete like volumes, OI stacks up or reduces based on the entry and exit of traders. Notice how OI and volume change on a daily basis. However, it is not true for OI. From a stand-alone perspective both OI and volume numbers are pretty useless.
However traders generally associate these numbers with prices to draw an inference about the market. Unlike volumes, 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. Do note, if there is an abnormally high OI backed by a rapid increase or decrease in prices then be cautious.
This situation simply means that there is a lot of euphoria and leverage being built up in the market. In situations like this, even a small trigger could lead to a lot of panic in the market. And with this, I would like to conclude this module on Futures Trading. I hope you enjoyed reading through this module as much as I enjoyed writing it! Hi Sir, Please correct me if I am wrong. I am a price action day trader. I never used OI data till now. As per me, the trend changes when a valid pivot is broken.
Suppose, a trend changing pivot is triggered with a decrease in OI. Does that mean, people are losing confidence in the trend and that makes the trend change more trustworthy?? Or, as the OI is decreasing which means people are not taking any positions in the new trend , hence its better to wait for the confirmation??
You can treat it that way…however another way to look at it is when OI increases it simply means there are too people betting on the same outcome. In fact I personally dont use OI much. I had bought Nifty PE 20 lots 64, I found that it hit 74 2: Suggest you read this — http: Are there any plans to offer this on Pi? I will try and include a chapter based on this sometime soon. Query related to Options: At the EOD Spot moved to Eventhough the option is far away from the expiry but why the depreciation in PUT price?
The CE is deep ITM option, whose delta is close to 1, hence the option behaves very similar to spot. We will talk about this and more shortly in options. All these queries will be sorted for you. Request you to kindly stay tuned till then. How is this possible if there is a seller for every buyer?
Will keep you posted as soon as I get an answer myself. Having said that, remember the OI data is a carry forward number and changes each day of the series. Where as the volume is for the day it only increases as the day progresses, where as OI can change. I have illustrated this in section Cost of carry is simply the interest rate component in the futures pricing formula….
Brilliant work Karthik…its really very helpful.. Thank so much for the kind words. We have already started work on Options module, in fact the first chapter should be uploaded sometime today. Will talk about volatility in detail in the options theory module.
Great Work and Fantastic write up. You have taken so much time in explaining all the possibilities that I have understood on FUTURES trading much better than anyone who has tried to explain the same to be. The same is explained here — http: As a intraday trader what are the charts or data that u watch closely before placing an order. I used to watch RSI , volumes and Total bid and ask quantity.
In no particular order — Support Resistance, Candlestick patterns, generic dow pattern, overall sentiment in the market, overall sentiment in that particular stock, fundamental news scan, volumes, and moving averages. Honestly I have never seen this kind of write up anywhere. Hats off to u guys!!
Karthik, Now i have covered the first four modules of varsity by finishing the futures module. Am I good to go for trading in futures using TA checklist?. Do I need to complete Options module to select a good trade to select either futures or options trade based on the conditions? Nope, you should be good to go.More...