The Power Of Open Interest (OI) in Options Trading Has Just Gone Viral in 2022 - Profile Traders
Updated: Dec 13, 2022
If you know how to use 'Tradingview' or 'Gocharting,' you are probably very close to succeeding in options trading.
All you have to do is connect the dots.
The problem is most traders experience the following:
They fail to analyze demand and supply.
They don't know how to interpret 'Volume' in the right way.
They fail to decode the big players' actions.
Open Interest (OI) will help most traders to shatter these issues and to walk on the successful path in trading.
What is Open Interest?
Open interest (OI) is the number of contracts of particular security (stock or index) that have been traded but not yet liquidated by an opposite trade or by delivery.
In simple words, OI is the outstanding or pending contract held by the trading community at any time.
If open interest increases, it suggests that new money is coming into the market and that there is continued interest in holding positions in the contract (either bullish or bearish).
If open interest declines, it may suggest that some participants are losing interest or that positions are being closed out.
Open interest can be used as a gauge to determine whether a market is becoming more or less bullish or bearish.
The above image shows an example of OI data for Adani Ent stocks. On 6/Oct/2022, after the market close, OI is 15.65 million.
We do share live intraday trades (based on open interest) on our Telegram Channel. To know more, you can join here - Traders Group Run by Indrazith
How to Read Open Interest Data?
Open Interest (OI) is associated with futures and options trading. In this section, we will see how OI impacts the futures, and in the subsequent sections, we will study how it affects stocks and options.
If a buyer and seller initiate a new position in XYZ stock futures, then the OI of XYZ stock futures will increase by 1.
Similarly, if both close their position, then the OI of XYZ stock futures will decrease by 1.
Suppose an existing buyer or seller passes their position to a new trader. In that case, OI remains unchanged (volume count increases in this case).
In this way, OI provides accurate information about the demand or supply for a particular security.
Open interest can also be used to confirm price trends. If prices are rising and open interest is also increasing, this is generally seen as a bullish sign.
If you look at the Nifty chart, along with the price, OI is also increased. It shows the strong intent of buyers.
In this case, if you are holding a long trade, you can continue to hold until you see a corresponding increase in OI.
If you look at the Banknifty chart, the price is falling, but OI is increased. It shows the strong intent of sellers.
In this case, if you are holding a short trade, you can continue to hold until you see a corresponding increase in OI.
If you look at image 4, the price is falling, but OI is also falling. It indicates profit booking (long unwinding) by the traders who were holding a long position.
It is definitely not bullish, but at the same time, it is not completely bearish either.
In this case, if you are holding a long trade, you can close some positions or plan to exit if you see some increase in the OI along with a price fall.
If you look at image 5, the price is rising, but OI is falling. It indicates short covering by the traders who were holding a short position.
It is definitely not bearish, but at the same time, it is not completely bullish either.
In this case, if you are holding a short trade, you can close some positions or plan to exit if you see some increase in the OI along with a price rise.