How do Open interest give a glimpse what market is going to do and is it 100%? Do tools like LTP Calculator by Investing daddy, OI Pulse by Sivakumar Jayachandran and Autotrender by SMC work or not?
Now, basics of Open interest on options can be found on many websites including Quick Hack- Stock Trading hacks – Technical Analysis and Studies for trading hacks
Let’s dive into this vast topic today of open interest. Do you know that Indian indexes like Nifty and Banknifty are one of the highest traded indices in terms of turnover? As usual in short words “When Huge sum of money is involved then obviously then there is scope of manipulation and opportunities. No there is no doubt of it. And nobody puts their money to lose. An option buyer bets only small money but a option seller bets large amounts of money as margin requirements are huge. So when we study Option Chain then we always look in the perspective of option sellers not buyers.
Now huge positions are created by FII and Huge Institutions who have access to some huge money in option selling. From studying option chain what we get is a glimpse of what the big team are expecting he market to do. Say huge OI on 19500 Call option means they are expecting market stay below this strike price and a huge OI on 19400 put Option means they are expecting market of Nifty to stay above this strike price. Now 80–90% chance that market stays here (not 100%).
Now coming to the tools like LTP Calculator by investing daddy, OI Pulse by Sivakumar Jayachandran and Autotrender by SMC Global do they work or not?
They work for mostly with more or less 70–80%. How do they work? They work but analysing the Open Interest levels for major support and major resistance levels. Now coming to change of Open interest during the day analysis tells what market can do on the day, say more call options sold then market may stay sideways to bearish but not bullish. In the same way, change of Open interest say more put options sold then market may stay sideways to bullish but not bearish.
The difference in Change of OI increasing (PUT OI minus CALL OI) gives the trending nature of the index or stock. Say if it is increasing then market may move up and if decreasing then market move down.
Now levels at which market can breach above normally tends to lose its power in terms of Open Interest say if market is to breach a level like 19500 Call then mostly it will start showing weakness in OI in terms of Open Interest like Call OI decreasing and Put OI increasing.
Same details are also written on https://www.quora.com/profile/Vamshidhar-Reddy-Bokka/How-do-Open-interest-give-a-glimpse-what-market-is-going-to-do-and-is-it-100-Do-tools-like-LTP-Calculator-by-investing
More details on LTP Calculator can be found here where i have written a independent review and summary.
OI Pulse review will be updated soon.
Auto trender review will be updated soon.
Lastly, any tool is as useful as person who uses it like a weapon in the arms of soldier or a pen in the hands of writer. Tools give a idea of where market is headed but technical analysis and price action analysis is very important. Market analysis is all about Supply and Demand.