What is Open Interest ?
So far, we have discussed a number of strategies in option trading. Today, we will see “open Interest” in detail. Let’s have a look at the option interest of Nifty options today.
The above screen shows you the open interest of both call and put options. I have bifurcated call and put option with a read line. All contracts below the red line are call options and those above the line are put options.
Today nifty has closed at 8111, only 3 point above from yesterday’s close. Can you predict tomorrow’s Nifty direction from the above data ? to an extend , yes. If you read the open interest carefully, you can predict the direction of market and position yourself accordingly.
You can check the live option interest data on NSE India web site by clicking on the link. In order to predict the market direction, you need to analyse the first and last two column data in detail.
First, have a look at the first column “OI” and read the rows below the red line. It shows the open interest of call options 8150 CE to 8900 CE. Similarly in the last column “OI” shows the open interest for put options starting from 8100 PE to 7400 CE. Now Let’s check out what OI represents.
Let’s take an example of a cricket match between India and Australia. User A says Australia will win the match , while user B says India will win. So, both of them engage in a betting contract where one of them wins and the other loses. Similarly in case of Nifty options you are betting on the market direction. As per the data available, you expect the market will not cross 8500 in next few days. So you sell 8500 CE. At the same time someone at another side of the globe thinks that Nifty is going to cross the 8500 limit and he buys the 8500 CE contract from you.
Now both of you are engaged in a contract and the open interest of 8500 CE increases by 1. Later some time you decide to book profit from the position because you don’t want to loose your winning position. In this scenario a third person comes in picture and he purchases the contract from you. Please note, here the open interest remains unchanged. The reason is, no new contract has been created here but the existing contract got transferred from you to another person.
In short, opent interest increases when more and more people comes in and involve in new directional bets. It also indicates that fresh money is flowing to the market and people are expecting a movement in the market in either direction.
How do you monetise from Open Interest?
Very first, find out the call and put option where more open Interest are accumulated. It means most of the market participants are expecting the market will stay between these limits for the coming days. In the above screen shot , you can see the most OI accumulation is at 8700 CE (5928675 contracts) and 8000 PE (5264625 contracts). So as per the OI data, the possibility of nifty movement is 8000 at the lower side and 8700 at upper side for the coming days.
Once you get a fair idea about the market direction, you can apply strategies like short strangle , iron condor or even naked call and put selling. For more information about the strategies please visit our articles on trading and investing category.
You can make use of one more indicator from the above screen shot. Have you noticed the figures in the second column and the second last column reading “Change in OI”. For call options ranging from 8300 to 8700, the OI has negative values. It indicates that more and more contracts are getting closed and people are shifting to lower positions. 8200 and 8100 contracts have gained positive OI and it is clear that the upper side is capped around 8200 range.
In contrast with the Call options, there is no significant reduction in OI of put options. Some of them have accumulated OI aggressively. You can see most OI change at 8000 PE where fresh 439350 contract got added. It indicates that more and more market participant are betting on 8000 as the lowest position for nifty.
This is a very good piece of information right ?. Please read our other articles to effectively apply this information and earn profit from Market.
Hope this article helped you improve your trading skills. happy reading..