For every derivatives trader, Open Interest or OI is one of the most important figures to acknowledge and recognise for trading efficiently. Open interest speaks volumes about the liquidity in the market. Generally, the higher the open interest, the more the liquidity and vice versa. Generally, seasoned options traders carefully evaluate the open interest to identify a pattern and place pinpoint bets. This article discusses open interest and its importance.
What is Open Interest?
Open interest is a vital part of the options chain and is published on the NSE website every day when the market is open. The options chain contains information about OI, change in OI, volume, IV or Implied Volatility, LTP or Last Traded Price, Bid and Ask Quantity, Bid and Ask Price, and Strike Price. While open interest gives you a fair idea about NIFTY or individual stocks, expert traders look at all figures in the options chain to identify a pattern and place good bets.
Simply put, open interest is the absolute number of derivative contracts held by market participants at a trading session’s end. It is a dynamic figure displaying the market strength and traders’ sentiment. Open interest is calculated after adding the open contracts and subtracting the closed contracts. Let us understand open interest with an example.
Suppose three traders, Alok, Sunita, and Rajesh, plan to trade the NIFTY 18500 options contract on 1st February. Alok buys one lot of NIFTY, and the open interest becomes one (1). Now, Sunita buys five (5) lots and the open interest increases to six (6). After this, Rajesh sells four (4) lots of NIFTY 18500 contracts and the open interest increases to ten (10). If none of the three traders closes their positions by the end of the 1st February’s trading session, the open interest remains 10.
On 2nd February, Alok sells one lot of NIFTY 18500 contract he bought on 1st February. So, the NIFTY open interest drops to nine (9). If Sunita also sell her five lots, the OI would further drop to four (4). Now, if Rajesh buys the four lots of NIFTY 18500 contract he bought on the previous day, the open interest will be zero (0). If the open interest of any strike price is zero, it means no contracts are open or available. When the open interest of any strike price is zero, it means traders are not much interested in buying or selling the contracts of that strike price.
Why Should You Check Open Interest More Often?
NSE open interest gives you an insight into the market trend. By placing it side by side with volume, bid-ask price, and put-call ratio, investors and traders analyse the depth of the market trend and make informed decisions. Put call ratio helps you understand the direction of the trend. Generally, the open interest is higher in In-The-Money (ITM) call and put options and lower in Out-Of-Money (OTM) call and put options. If the open interest is high, you can expect adequate liquidity to enter and exit a trade any time you want.
5paisa Makes Derivatives Trading Super Easy
5paisa provides a free Demat and trading account to use the open interest data to trade efficiently. Open interest is a vital part of futures and options trading. Read well before placing any trade, as the derivatives market is generally more volatile than the cash market.