Thread by @tradersushma

📖 OPTION TRADING KI PAATHSHAALA 📖

A Thread on

📍 OPEN INTEREST 📍

#threadbytradersushma
#OptionsTrading
#StockMarketindia

OI is the total number of o/s F&O contracts that have not been settled yet.

OI indicates that contracts have been traded but not yet liquidated by an offsetting trade or exercise.

Some pointers ~

♦️ It indicates how many open positions are there in the market.
♦️ It is useful in understanding the liquidity of the market. Bigger the OI more liquid is the market.
♦️ If u add up all long & short positions, it should be 0 always.

♦️ OI is a lagging number. It’s not updated during the course of trading day.
♦️ As opposed to stocks which has fix number of shares outstanding, there’s no min/max number of options contracts that can exist for any given underlying stock.

Diff b/w OI & Volume

🔹Volume is the total no of contracts traded in a certain period, while OI is running total of active contracts.

🔹Each transaction counts towards daily volume.

🔹Higher the volume higher is the strength of price movement.

🔹Unlike volume, change in OI does not convey any directional view. It just gives the strength between bullish & bearish position.

🔹OI indicates the direction of money flow in & out of the market.

🔹Volume is not carried forward to next day while OI has implication for next day.
🔹At start of the day Volume is set to 0.
🔹Volume changes daily but OI may remain unchanged for days.

How OIs get build ?

💠 If both parties to the trade initiate a new position, OI will increase.
💠 If both parties to the trade close an existing or old position, OI will decrease.

💠 If one trader passes off his position to a new trader (one old buyer sells to one new buyer), OI will remain unchanged.

Increasing OI means new money flowing hence current trend will continue.

Decreasing OI means market is liquidating hence prevailing trend is coming to an end.

Abnormal high OI backed by rapid increase/decrease in price means bubble & a precursor to panic.

OI is a lead indicator of an impending change in trend.

Highest OI in put = that strike becomes support.

Highest OI in call = that strike becomes resistance.

High OI doesn’t necessary mean people trading that contract have the correct forecast on the stock.

Main benefit of trading options with high OI is that it tends to reflect greater liquidity for that contract.

To determine total OI, we need to know the totals from only one side, that is, buyer or seller & not the sum of both.

Interpretation of change in OI

Open Interest is a vast topic but above pointers are good to start. For detailed explanation, I found that @ZerodhaVarsity has the best writeup on this topic.

Link shared here ~
zerodha.com/varsity/chapte…

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Thank u for reading!