Open Interest (OI) data is like a list that shows how many F&O (futures and options) contracts are held open during the trading day. This data includes the change in OI from the last trading day to the present day in terms of absolute numbers and percentages.
In this article, you’ll get to know the details of open interest and how you can analyze it. You will also get a chance to learn future and option trading positions in different OI trends.
Analysis of Open Interest
OI is the total number of open contracts that are not yet closed till the end of the trading day. This helps in analyzing how a particular F&O contract is trading in the market and how active the traders are.
When a buyer or seller takes any new position, then the OI will increase by one contract. If the traders are closing their already held position, then the OI will decrease by one contract. If there is a simultaneous closing of an old position and opening of a new position, then the OI remains the same.
Let’s understand these three scenarios with examples.
- If you have bought 1 lot of XYZ futures and your friend has sold 1 lot of XYZ futures, then OI will go to 1 lot.
- After that, if you both reverse your position, then the OI will go down to 0.
- Other than this, if your friend sold his 1 lot of XYZ futures to another person, then the OI will remain at 1.
How to Trade in F&O using open interest?
You can learn future and option trading strategies in a better way by analyzing the open interest. Studying both the open interest and contract price can give you a hint to decide the best market position.
Here is the list of case scenarios through which you can decide your market position:
- Rising Trend in Both Contract Price and Open Interest
In this situation, the current bullish trend is most likely to continue and therefore you should not close your position. This is an indication to buy the new contract and hold it for a good long time to earn huge profits over a period of time.
- Falling Trend in Both Contract Price and Open Interest
In this situation, the current bearish trend is most likely to reverse and you can expect an upward or sideway trend in the future. You can consider selling your contract and slowly you can buy new contracts to get the maximum profits.
- Rising Trend in Contract Price and Falling Trend in Open Interest
In this situation, the current bullish trend is most likely to drop in the future and therefore you should close your position today to earn the secured profits and limit the probable losses.
- Falling Trend in Contract Price and Rising Trend in Open Interest
In this situation, the current bearish trend is most likely to continue and therefore you should close your positions today, and later on you can open them at a much lower price.
Open interest data can help you decide the market position according to where the trend is going. When OI is increasing, then many people are interested in this contract and the current trend continues to remain the same. When OI is decreasing, then it indicates that the current trend is most likely to change.
If you are keen to learn these strategies in detail and want to trade in F&O, you can study online trading courses on options trading offered by Upsurge.club and get started with your trading journey.