What Is Open Interest & Why Is It Important?3 min read
So, we recently launched the Open Interest Analysis feature in our F&O Dashboard. Check it out here – Paytm Money F&O Dashboard.
Open interest is said to be a very powerful data point in futures and options. Let’s explore what it is and why traders love it.
What Is Open Interest (OI)?
Open Interest tells us how many contracts are open and live i.e. outstanding in the market due to delivery/settlement or trader discretion for this call. The contract is considered “open” until the counterparty closes it.
- If a buyer and seller initiate a new position on the contract, OI rises by 1.
- If they both exit a contract position on a trade, then OI falls by 1.
- If a buyer or seller passes off their current position to a new buyer or seller, then OI remains unchanged.
- Increasing open interest represents additional money coming into the market while decreasing open interest shows money flowing away.
What Does High Open Interest of Call and Put Indicate?
These indicate the level at which traders have built positions expecting the market to either go up or down.
A high OI build-up for a call option at a particular strike implies a resistance at that strike price. A high OI build up for a put option at a particular strike implies support at that price.
Why Is Open Interest Important?
By analysing OI carefully, traders can understand where the smart money is betting. You can easily gauge the short term support and resistance for the market. The highest PUT option OI strike will be the support and highest CALL OI Strike will be the resistance for the market.
Note – OI is always seen from the seller’s perspective because selling of the option needs more money (margin money) and has unlimited risk. It is assumed that sellers have better access to information, so they are risking their capital. It is assumed that highest put OI strike has maximum put sellers and highest call OI strike has maximum call sellers.
How To Use OI To Understand Support & Resistance on Paytm Money App?
Let’s understand with the example
In the above image, the 36,500 strike put has the highest OI among all the puts and 37,000 strike call has the highest OI among all the calls.
This means 36,500 put has the highest number of sellers so market breaching this level is unlikely, so this is the support for that particular expiry for Bank Nifty. Whereas 37,000 has the highest call OI, so it will work as a resistance.
Outstanding Open Interest and Change In Open Interest on Paytm Money App
One buy and one sell transaction in the same contract with the same expiry creates one open interest. Outstanding open interest is the total number of options outstanding. Open Interest help us understand the support and resistance for the underlying. The change in open interest helps identify the change in market sentiment and next possible support and resistance.
After identifying the support and resistance on the basis of open interest, traders can track daily change in the same. If there is any significant unwinding of open interest in one strike and addition in another strike (upper or lower), it indicates a change in the market view of big traders.
For example, a significant open interest unwinding in 36,500 put which gets added to the 36,000 put means that the market is likely to come down with 36,000 as a new support level.
Source for Open Interest data on Paytm Money – Heckyl Technologies Private Limited
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