It's not just about Open Interest!
It's not just about Open Interest!

Chapter 3

It's Not Just About Open Interest!

Open interest is the number of outstanding or unsettled contracts of a particular derivative instrument. It is a metric or data point that helps gauge the traders’ participation in an underlying. Rising Open Interest points at rise in the trading interest in the underlying. This rise could be a result of rise in trading positions by variety of trading participants. The participant may be retail or institutional. High open interest means that there are large number of derivative contracts still open.

In case of futures, if prices rise up and open interest also increases, it suggests that new participants are entering the market despite rising prices, implying an upward or bullish bias. 

If prices were to move lower and open interest were to increase, it would be suggestive of a downward bias.

Continuing, if prices were to move lower and open interest were to decrease, it would be suggestive of long liquidation.

Further, if prices were to move higher and open interest lower, implies participants who were sellers are buying back in the instrument.

The table indicates and highlights price-oi relationship and the bias, a trader can formulate on the markets.

Traders cannot assert a directional move based on price of Nifty and Nifty open interest dynamics, or a similar case scenario for price of F&O stocks on NSE and their NSE open interest. But these characteristics help in formulating a bias. It should be noted that though the rally in case of short covering, called a dead cat bounce is ferocious and short lived; but it may be a pause in the overall short built-up cycle, hence the bias of the overall mood of the market is kept as Neutral.

 

To re-affirm the bias, other indicators and studies could be used to substantiate it, before a derivative trade is formulated and acted upon.

Quantsapp, India’s leading option analytics platform has a ready tool to help traders gauge this bias. The open interest and price combinations are studied for NIFTY futures and BANKNIFTY futures and other F&O stocks; ready narrative for the benefit of traders gets populated, as shown in the template, ahead.

Nifty open interest change, along with price change have been highlighted ahead, using Quantsapp built-up tool. Similarly, variety of F&O stocks are listed with their price change and NSE open interest change of that specific scrip.

The narration of variety of scrips/indices based on their price – open interest relationship.
Another short side scrips based on the price – open interest relationship.

FAQs

Does open interest alone gives bias on the markets?

No, open interest or open interest change alone cannot give bias on the markets/underlying. It has to be compared to price change, to formulate the needful.

What is short covering?

When the open interest of a financial derivative/futures decreases and prices move higher of the futures, one observes a short covering move.

What is long unwinding?

When the price falls coupled with drop in open interest of a financial derivative implies that positions are getting squared off with a drop in prices, i.e. unwinding of longs or long unwinding.

What does increase in open interest indicate?

Open interest is a metric or data point that helps gauge the traders’ participation in an underlying. Rising Open Interest points at rise in the trading interest in the underlying. This rise could be a result of rise in trading positions by variety of trading participants.