Generally, periods of low open interest are a holding period in which investors are trying to predict where the market will go before deciding on new strategies.

Why open interest matters to you

Market tops and bottoms typically coincide with slowing or low open interest as opening new contracts can be risky at these points of trend reversal. This sentiment exists because traders lacking market depth have difficulty forecasting short-term market movement. With lower market data fees, the SIP feed becomes a viable and more cost-effective alternative for options traders.

Open interest along with price and trading volume provides insight into market trends—without requiring visibility to full market depth. In this way, options trading firms can reduce costs by only accessing the SIP and forgoing pricier, depth feeds. By using the OPRA feed and analyzing open interest, options traders can cut down on market data costs while still trading competitively. Exegy Insights Disclaimer. It is no revelation that US market structure is shifting. Skip to main content. What is Open Interest?

Definition of 'Open Interest'

Indications from High Open Interest On its own, high open interest simply indicates that the current market trend driving the underlying price is strong or, in other words, that there is investor confidence that the trend will continue. Open Interest and Underlying Price To derive more nuanced information about market movement from open interest, compare it to the price of the stock underlying the option.

Table 1. Open Interest and Market Trends. Related Resources. Read more. Stay up to date with our newsletter:. Name First Last. This field is for validation purposes and should be left unchanged. Options sellers profit from this property of options. So we can say our presumption regarding sellers of options is logically true. Therefore all tall columns show big obstacles. High open interest build-up at puts PE show support. Similarly high open interest at CE shows resistance. Hence, in the scenario shown above, we can presumably sell 4 February weekly Nifty CE or CE at the current price and earn the premium at expiry.

The most likelihood shows Nifty Future may not cross within this week.

But the scenario may change. Nifty may move beyond within this week. You will earn the profit from this trade.

Open Interest analysis of futures and options | Motilal Oswal

Similarly, we can find support regions through build-up in put options. A tall column in PE shows big support zone. Put sellers can write put below to exploit premium in the weekly series. Though compared to the build-up of open interest in calls, the open interest in puts is not that strong. So the present scenario also shows that the traders at present think market may slide beyond But all these are presumptions. The stock market is, by nature very dynamic. Therefore within a moment, the scenario changes completely and sellers take positions at different strikes.

How to use Open Interest Strategy to increase profitability?

With sellers building new positions at different strike prices, the complete market dynamics change. So all other sellers then create new positions. The short-covering happens and we find more active calls and puts at different strike prices. Now, if we compare the above two images, we will find some interesting things.

Both the pictures were taken from stockmaniacs. We can see that the OI scenario has already changed. With small movements in Nifty, the OI changes are already visible. We can see OI are being newly added at different strike prices. This allows us to conclude that options traders trade all the times.

They take new positions in a dynamic manner. But this is not all.

I have alrady mentioned earlier that the volume plays a significant role. When option traders shift their position some changes take place. Writers exit strike prices, open interest comes down drastically. But the volume increase at those strikes. This corelation gives us good trading ideas. When at some strike price open interest decreases and volume increases drastically, above their average values, we can say short covering is taking place. Sellers get trapped at that strike price and shifting position. Short covering takes place there.

OPTIONTIGER BLOG

On the other hand, when open interest in options increases and price is going below average, we can say traders are building new shorts. At those strike prices, options traders can take a position as sellers. I will show you how you can take a position in options by seeing the live chart. Kindly look at the chart closely. This is a chart from Zerodha Kite. The picture was taken at around hrs. I have shown you how you can trade options using the live charts in Zerodha. This is a 5 min chart in Zerodha Kite. The chart shows the price movement of the 4th.

February call options. In the price chart, there is VWAP. There is also an open interest chart. With open interest, a 20 SMA simple moving average chart is also there. I have also added volume with volume 20 SMA. Also 14 days RSI is there. Now, look at the blue marked portion of the chart. Here the options price has come down below the VWAP volume-weighted average price.

It happened at around 11 AM. See the volume is more than double the average in that column. Open interest has also climbed above its day moving average. The RSI went below the 40 marks. It shows the selling has started on calls. The price is around Rs The trader can sell calls CE after setting proper stop loss and target.

This trade may earn a good profit for the trader today. But the trader should go out of the trade before the market closes, even if the target or stop loss is not hit. Illiquid options are those options which can not be traded at prevalent market rate. Traders should avoid these kinds of options. When the volume becomes very low, they become illiquid options.

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In these options, open interest is also at their lowest. So, there are very few open contracts available for options trades. Once you open a contract in illiquid options, it becomes very hard to exit from that contract as long as they remain illiquid.

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But if due to sudden price movement of the underlying, these options attract traders, then they do not remain illiquid any more. So they are traded like others. At times, traders prefer buying illiquid options. This site uses Akismet to reduce spam. Learn how your comment data is processed. Partha Dhar January 23, January 23, What is options open interest?

How much open interest is useful for options?