What is open interest OI and why is it important?

 

What is open interest OI and why is it important?

 

When doing any stock analysis then Open Interest of that stock plays a good way of confirmation of what is to happen next. Is the stock operator going to take stock up or down?

What are the basics and Rules? 

What is Open Interest?

Open interest is the total number of outstanding futures and options (F&O) contracts at any point in time.

How Open Interest is Calculated?

For example, if trader A buys 1 futures contract from trader B(who is the seller), then open interest of that scrip rises by 1.
If another trader C say buys 2 futures contracts of the same scrip from trader D, then the open interest rises by 2 and become 3.
Now, if trader A unwinds (covers) his/her position and the counter party is either B or D, then the open interest of the scrip will reduce by that quantity. But if A unwinds his position, and the counter party is a new entrant, say E, then the open interest will remain unchanged. This is because while A has squared off his position, E’s position is still open. (As only hands are getting changed , no new contract is sold or written).

How to Interpret Open Interest and How to Trade?

Tracking Open Interest alone does not signify much information, Explore the co-relation power of Open Interest, Volume and Price movement. Increase in Price with increase in Open Interest is positive for the stock (Fresh Longs). Decrease in Price with increase in Open Interest is considered negative (Fresh Shorts)

Summary of Open interest in stock analysis and options:

1. Price going up and o/i up/increase > long build
2. Price going down, o/i up/increase > short build
3. Price going up, o/i down/decrease > long unwind
4. Price going down, o/i down/decrease > short unwind