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What is open interest in stock market and its effect
We hear lot about a term “open interest “ so in this session we will see the meaning of it and how it is used to gauge the market.
1. What is open interest in equity derivatives?
Open interest is the total number of outstanding futures and options (F&O) contracts at any point in time. For instance, if trader X buys 2 futures contracts from trader Y, then open interest rises by 2. The level of outstanding positions in the derivatives segment is one of the parameters widely tracked by the market.
2. How can one interpret open interest data?
While open interest shows the total number of outstanding contracts, the data is not much of use, if looked at on a standalone basis. In the futures segment, open interest data need to be read along with price changes in the futures contract. A rise in open interest in a futures contract along with its price indicates bullishness, which means investors are creating long positions.
Traders may benchmark the price changes in the futures contract to the underlying (the cash market). In the options segment, a change in open interest in put or call options enables traders calculate the put call ratio (PCR) - a popular sentiment indicator of options traders worldwide, which is the number of puts divided by the number of calls.
3. Is open interest the same as trading volumes?
Open interest should not be mistaken for volumes, which is the total number of contracts that have been traded in a trading session. Higher the number of trades in a session, more will the volumes swell, unlike open interest, which drops if a contract is liquidated. Usually, traders use volumes data along with open interest data and prices to derive a more concrete
4. What is the reading when open interest is higher-than-average?
Many experienced traders perceive an abnormally high open interest in a rising market as a warning that there could be a reversal in the bullish trend. This is because several of the so-called weaker hands, who had jumped on to the bandwagon when the market was rising could square up positions at the slightest signs of correction, thereby sparking a self-feeding fall. view on the market.
5. Daily Open Interest data from NSE
Please visit below link to down load daily data from NSE
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