In the trading context, open Interest is the total number of options and futures contracts that are currently active or not yet settled against an asset as of a given time. It is mainly used as an indication to mark positions of securities in the market that have not yet been closed for an unknown reason.
The open interest can increase or decrease depending on market fluctuations.
A market trend can be observed through price movements which can go upward or downward. The sustainability of such trends, however, is often questionable. In the stock market, there are certain factors that help in backing up the price movements when they take a certain direction. Open interest data is one such factor which offers reasoning for a sustainable trend and also a trend reversal.
When prices of securities move up or down and the future open interest rises with the price to a certain level, investors can expect the price movement to be sustainable.
In case there is an ongoing trend in the market with a sudden drop in open interest of futures, investors should not necessarily believe the trend, since there can be chances of trend reversal.
A market trend is dependent on the number of fresh contracts that exchange hands due to a new price move. If fresh funds do not flow into the market and fresh contracts are not exchanging hands, investors should be doubtful about the ongoing trend.
In any futures market, two factors play a very important role:
Traders and investors consider both these while predicting market trends.
While both Open interest and volume are very similar, often causing confusion for new traders, they are not entirely the same. Here are some points that can help in differentiating these two:
Here is an example to understand these concepts further:
Suppose three traders participate in a market, X, Y, and Z.
Day 1:
Day 2:
To conclude, we can observe that volume may change daily. However, the open interest may remain unchanged. Open interest may stay the same unless there are new contracts initiated in the market or the old contracts get settled or executed.
Investors can monitor the changes in open interest at the end of each trading day to draw conclusions about the day’s market activity. Here’s how it can benefit:
To find the open interest in stocks, you need to follow these steps:
In the Indian context, open interest is an important indicator for traders and investors who trade in futures and options. It helps them to determine the liquidity and the level of interest in a particular stock. Higher open interest indicates that more traders are interested in a particular stock, which can lead to more trading opportunities and increased volatility. On the other hand, lower open interest can suggest that there is less activity and interest in a stock.
As a word of caution, investors should refrain from venturing into a market when there are a lot of open positions combined with significant price movements. It could indicate that the market is experiencing an unexplained positive outlook. In case such a situation arises, a small trigger may be enough to result in panic among investors and traders. Therefore, investors must carefully study open interest before venturing into the market.
Futures and Options (F&O) are derivative products. These are financial contracts that primarily derive their value from an underlying asset.
Margin is the amount that a trader has to pay the broker to trade in futures. It is calculated as a percentage of the transactions made. Margins can be higher during volatile markets.
While stock investments require an investor to have sufficient capital at hand, futures trading is mainly done by paying a margin and therefore it requires limited capital. Futures trading is also preferable since it offers the benefit of leverage. New investors must first learn the basics of futures trading before foraying into the same.
Open interest, in case of day trading, is the number of buy orders requested before the start of the market. If the open interest is high, it means investors are ready to add stock to their positions or start new positions. This indicates that the stock price may likely go up.
To begin trading in F&O market, you will need a trading account, or a derivative trading account. Trading can be done on BSE or NSE and on the stocks that F&O is available on.
Thank you for showing interest in taking a BTST position using our Delivery Plus product.…
Thank you for showing interest in the consultation on trading strategies!Our expert will reach out…
Even if you are a new participant in the stock market, the process of buying…
A company’s debt position can be gauged using the interest coverage ratio or ICR. This…
Muhurat Trading, a cherished tradition in the Indian stock market, takes place on Diwali, the…
All that glitters is not gold, this is a saying that we have heard for…