What is Open Interest in Future and Options Trading? Definition, Examples and Analysis


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Open Interest Definition:

The Open interest is the total number of options or futures contracts that have not been closed or released on a particular day. It also refers to the number of orders for the world market before the stock market log. Open interest is an important fact for options traders to follow. Using these statistics, along with other measures, call option traders can get a clearer picture of the overall market. Ultimately, open interest is useful in understanding the importance of the activity of buying and selling.

Calculate the open in the call option is watching market rates. Open interest identifies the number of option contracts outstanding now called. Because each buyer needs a salesperson corresponding to an exchange, each contract listed represents a buyer and a seller. Therefore, if open interest is 900, indicating that there are 900 long or 900 short positions. This does not necessarily mean that there are 900 buyers and 900 sellers since a person can negotiate multiple call options. Track the changes in open interest. When open interest is increased, this indicates that traders are opening more positions option. When open interest decreases, it shows that the traders are closing positions option. Remember, every trade involves a buyer and a seller.

Compare the open with the volume of operations to discern the nature of the activity of buying and selling interest. Open interest contracts the number of outstanding options is displayed, while the trading volume the number of call options traded shown over a period of time. Trading volume indicates the amount of trading activity in the open, while showing if traders are buying and selling everything to open new positions or close existing positions in general.


Wiki Finance pedia - e-learning course on Futures Trading Wikipedia Chapter - What is Open Interest in Future and Options Trading Definition, Examples and AnalysisBrief Concept of Open Interest:

This concept applies only to the negotiation of contracts in the futures markets. Open interest is the total number of contracts that remain open at the end of the trading session, or what is the same total positions or contracts upwards (long positions), or the total of positions or contracts downward (short positions), remaining open or pending settlement at the end of each Session recruitment. Because every transaction has a buyer and a seller, the open interest is the total of positions upward or downward that remain open but not the sum of the two. It’s usually represented by a dotted line drawn between the stock price and volume bars.

The analysis of this concept helps to give an idea about the direction in which money flows, and therefore, can draw some conclusions regarding the trend. When open interest progresses; It must be checked if the analyzed raw materials are seasonal and to what extent. When we are in this case it is best to analyze the evolution of open interest regarding seasonal statistical average in previous years.


Open Interest Examples:

Scenario-1: Suppose, Mr. Jhon buys 5 lots of NIFTY future contract, then open interest for NIFTY contract will be increased by 5.

Scenario-2: Whereas Ms. Jennifer sells 5 Lots of NIFTY future contract, then open interest will be decreased by count 5.

Scenario-3: Assume that Ms. Jhon closed its open position by squaring off 5 lots of NIFTY and Mr. James opens the position of NIFTY with lot size of 5; In that case there will be no change in the open interest count.


Connections Between Open Interest vs Volumes:

Both the volume and the open interest will reflect the mindset of the stock market and the trader as well. Hence, the compression will be vital to become successful consistently. By definition, the volume is the sum of total lots traded, or we can say, what the market has moved. It refers to a specific period of time; the daily values ​​are normally taken. Meanwhile, the open interest represents the volume of orders that remain open overnight (for more than one session).

Now we can make an interesting question, if the share price varies, also vary the volume and / or interest of open? The answer is emphatically NO. It is not necessary that the price moves to cause a change in volume or open interest, but it normally a change in volume and / or open interest produces a change in prices or you can give us a signal to anticipate a possible change in trend. No operator will always win, sooner or later a trader will close positions, either profit or loss, generating a turn in the trend.


Useful Information for Trading in Futures and Options:

High Volume: Shows mass participation in the market.

Low volume: Represent low market share and lower participation’s.

High Open Interest: It can be translated into an increase in overnight operations left open, which means taking on more risk. Generally traders are traders who do this experience and high capital. If opened interest decreases we can say that there are traders closing positions assuming a loss or a gain, we can say that most of these closures are to be performed poorly capitalized and experienced traders will receive consideration for a more professional and experienced trader.


Advantages and Open Interest Analysis in F&O Market:

With the useful information described in above paragraph we can figure it out, who is participating in the market and, most importantly, you are doing, which will allow us to support our decisions. Let us focus and 4 possibilities and scenarios to build trading strategies:

1. This way if the price is going up and the volume and opened interest declining, know that traders are beginning to close positions, such as winning or losing purchase sale. We also know that the number of traders willing to keep buying is down. So what? Most likely, the market turns downward. Similarly we can talk if prices are falling and volume and opened interest are falling, chances are that the price turns upward.

2. Price goes up, volume and opened interest increased. In this case the number of operators who rely on the uptrend and who are willing to maintain their positions is increasing. We can assume that the uptrend is reliable and may continue for a while. Similarly, low price and volume and open interest rises: the downtrend is reliable.

3. We followed the course of time; we can now enter the phase in which prices continue to rise, as the volume and open interests. They are now entering late buyers and early sellers; the market is susceptible to a bearish reversal after which we can find a buying opportunity. In the case of falling prices, you can produce a bullish reversal after which there may be a good selling opportunity.

4. Finally talk about the situation in which prices rise and both the open interests as well as volume decreased. In this case we can say that there is no clear direction that traders are operating on short and long and probably the most capitalized traders are closing long positions as prices rise. In this case it is very likely a sharp turn downward, very typical when major highs are reached. In the case of falling prices and increase in volume and open interests will be very likely a sharp turn upward.


Conclusion:

Now that you understand the importance of open interest in option trading and future trading. It will be really useful to take the decision on your buying and selling in derivative market. Hope it had been useful to understand the basics concept of future trading. You can look forward for other tutorial guides on our website for more informative knowledge before trading before you plan to start trading in F&O derivative market.

 

- Tutorial Course - Basics of Futures Trading for Beginners -

» e-Learning Chapter 1: What is Futures Contract and Types of Future Contracts?

» e-Learning Chapter 2: What is Futures Trade and How to Trade in Future Markets?

» e-Learning Chapter 3: What is Leverage and Payoff? Definition with Example.

» e-Learning Chapter 4: What is Shorting or Short Sale? Definition and Rules.

» e-Learning Chapter 5: What is Nifty Futures and How to Trade in Nifty futures?

» e-Learning Chapter 6: What are Futures Prices? Definition and Effects of Dividends.

» e-Learning Chapter 7: What is Hedging? Examples and Hedging Strategies.

» Currently Reading: What is Open Interest? Examples and Analysis.

» e-Learning Chapter 9: What is Margin and M2M (Mark to Market)?

» e-Learning Chapter 10: What is Margin Trading? Advantages and Risk of Leverage.

» e-Learning Chapter 11: What is Hedger, Speculator and Margin Calculation?

» e-Learning Chapter 12: Futures Trading Quiz – Basics of Futures Trading for Beginners.

  

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